Economic Nexus

What is Economic Nexus?

Economic nexus is a legal standard for sales tax collection. It assesses whether a business must collect and remit sales tax based on its financial activity within a state, not just its physical presence. This concept gained prominence after the 2018 U.S. Supreme Court decision, South Dakota v. Wayfair, Inc. The ruling allows states to impose sales tax obligations on businesses that meet specific revenue or transaction thresholds.

Synonyms

• Marketplace nexus
• Remote seller nexus
• Sales tax nexus

How Does Economic Nexus Work?

Economic nexus functions through a system of economic thresholds that, when surpassed, trigger tax obligations for businesses. Here’s a breakdown of how it operates:

Revenue and Transaction Thresholds

Economic nexus laws are primarily based on two types of thresholds: revenue and transactions. If a business exceeds the revenue threshold, such as $100,000 in sales within a year, or conducts a certain number of transactions – often around 200 separate sales – it becomes liable to collect and remit sales tax in that state.

Economic nexus laws differ from state to state, each setting its own thresholds and compliance requirements. Some states may have only a revenue threshold, while others might include both revenue and transaction thresholds. Businesses must understand the specific sales tax laws in each state where they have customers.

Tax Collection Obligations

Once these thresholds are crossed, a business must take specific actions. The first step is to register with the state’s tax authority, which allows the company to legally collect sales taxes from its customers. After collection, the business is responsible for remitting the tax to the state, ensuring compliance with state laws. Failure to do so can result in penalties.

Impact on Remote Sellers

These rules apply mainly to remote sellers—businesses that sell products or services in a state without a physical presence. This aspect of economic nexus ensures that online and out-of-state businesses contribute fairly to state tax revenues, leveling the playing field with local businesses.

Many states also require marketplace facilitators, like Amazon or eBay, to handle tax collection on behalf of third-party sellers. This means that the marketplace, rather than the individual seller, is responsible for collecting and remitting sales tax for transactions on their platform.

Ongoing Compliance

Businesses must regularly review their sales and transactions to comply with the varying state laws. This often requires an annual review of economic presence to determine if nexus thresholds have been met, triggering new tax obligations.

Importance and Benefits of Understanding Economic Nexus

Understanding economic nexus is necessary for businesses that operate across state lines, particularly in e-commerce and other remote sales models. Here’s why economic nexus matters in billing operations and compliance:

• Compliance: Knowing where economic nexus applies helps businesses follow state tax laws, avoiding fines and legal issues.
• Financial Planning: Understanding nexus requirements helps businesses plan for tax obligations in different states, making budgeting easier.
• Market Expansion: Knowing where economic nexus applies allows businesses to strategically plan market expansions while managing tax liabilities.
• Risk Management: Reduces the financial risk of under-collection or non-collection of sales tax, which can lead to significant financial penalties.

Examples of Economic Nexus Laws

Economic nexus laws differ by state and are subject to change. Often, the thresholds are based on data from the previous calendar year. Below is a table summarizing the thresholds for several states as of 2024:

These laws ensure that all businesses, including online sellers, contribute to state tax revenue when they engage in significant economic activity within a state.

How to Determine Economic Nexus

Determining whether your business has an economic nexus in a particular state involves several steps. Here’s a more detailed breakdown:

Step 1: Assess Your Sales Activity

The first step is to regularly monitor your sales revenue and the number of transactions you conduct in each state. Economic nexus thresholds are often tied to specific amounts of income or a number of transactions within a state. By keeping a close eye on these numbers, you can gauge when you might be approaching a threshold that could trigger tax obligations.

Our tip: Schedule regular reviews of your sales data—monthly or quarterly, depending on your business volume. This proactive approach helps you avoid surprises and gives you time to prepare if you’re nearing a state’s threshold.

Step 2: Understand State-Specific Nexus Laws

It’s important to familiarize yourself with the rules in every state where you do business. This means knowing not just the revenue and transaction thresholds but also understanding any nuances in the law, such as whether the threshold is based on gross sales or taxable sales.

Our tip: Keep a reference document or a spreadsheet with the nexus laws for all the states where you operate. Update it regularly as laws change, and review it whenever you enter a new market or your sales patterns shift.

Step 3: Leverage Software Tools for Compliance

Manual sales and transaction thresholding tracking can be time-consuming and prone to error. This is where sales tax compliance software comes in. These tools are designed to track your sales across different states, automatically calculating whether you’re approaching or have exceeded a nexus threshold. They can also alert you when it’s time to take action, reducing the risk of human error.

Our tip: Invest in a reputable sales tax compliance tool that integrates with your accounting platform. Look for one that offers real-time tracking and automatic alerts, so you can stay on top of your obligations without constant manual checks.

Step 4: Register with State Tax Authorities

Once you’ve exceeded a state’s economic nexus threshold, the next critical step is registering with the state’s tax authorities. This registration is what authorizes you to collect sales tax from your customers in that state. Without this step, you risk non-compliance, which can lead to penalties.

Our tip: As soon as you hit a threshold, prioritize registration. Delaying this step can result in fines or back taxes, which can be costly. Some states allow online registration, so look into the fastest way to get it done.

Step 5: File and Remit Sales Tax Promptly

After registering and collecting sales tax, it’s vital to file your sales tax returns and remit the collected tax to the state on time. Each state has different filing deadlines. Depending on your sales volume, filing frequencies can vary from monthly to quarterly.

Our tip: Set up a calendar with all the filing deadlines for each state where you collect sales tax. Use automated reminders through your tax software or personal calendar to ensure you never miss a due date. Consistent, timely filing helps you avoid unnecessary penalties and keeps your business in good standing.

Key Takeaways

Economic nexus means your business may need to collect and pay sales tax in states where you exceed specific sales or transaction thresholds, even without a physical presence there. Each state has its own rules, usually requiring tax collection if sales exceed $100,000 or involve over 200 transactions. To stay compliant, it’s essential to know the laws in every state where you do business, use software to track sales, and ensure timely registration and filing with state tax authorities. Reviewing your sales activity can help you avoid penalties and keep your business running smoothly.

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