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In 2018 the U.S. Supreme court upheld South Dakota’s “economic nexus” statute in South Dakota v. Wayfair. This landmark case expanded the power of states to collect sales tax from remote sellers. Today, nearly every state that collects sales tax has enacted a similar law. What does this mean for you? If your company does business across state lines, it’s a vital task to reexamine your sales tax obligations.
A state is constitutionally prohibited from taxing business activities unless those activities have a substantial “nexus” or association with the state. Before the Wayfair court decision, merely selling products to customers in a state wasn’t enough to establish nexus. Nexus, by definition, required a physical presence in the state, such as offices, retail stores, manufacturing or distribution facilities, or sales reps.
In Wayfair, the Supreme Court determined a business could establish nexus through economic or virtual contacts with a state, regardless of the physical presence requirement. The Court didn’t create a specific standard for determining whether a business has “substantial” contacts within a state. However, the Court did rule the framework established by South Dakota’s law is sufficient:
Out-of-state companies must collect and remit South Dakota sales taxes if, in the current or previous calendar year, they have:
- More than $100,000 in gross sales of products or services delivered into the state, or
- 200 or more separate transactions for the delivery of goods or services into the state.
The vast majority of states now have economic nexus laws, although the specifics may vary. Many states adopted the same sales and transaction thresholds accepted in Wayfair, but several states have chosen to apply different thresholds. Conversely, many states have decided not to impose transaction thresholds, which many view as unfair to smaller sellers (an example of a limit might be 200 sales of $5 each would create nexus).
If your business has online, telephone or mail-order sales in states where it lacks a physical presence, it’s vital to find out whether those states have economic nexus laws and determine whether your business activities are sufficient to trigger them. If you discover you have nexus within a state, you’ll need to register with the state and collect state and applicable local taxes on all taxable sales there. Tax-exempt sales transactions will not negate your responsibility as you’ll need to secure exemption certifications for each jurisdiction where you do business. Alternatively, you might decide to reduce or eliminate your activities in individual states, especially if the benefits don’t justify the compliance costs.
If you sell through Amazon or eBay or similar, some states require sales tax collection
If you conduct sales through a “marketplace facilitator,” such as Amazon or eBay, be aware that an increasing number of states have passed laws that require such businesses to collect taxes on sales they facilitate for vendors using their platforms.
If you need assistance in setting up processes to collect sales tax or you have questions about your responsibilities, contact JLK Rosenberger at 949-860-9895 or click here to contact us.