Entering the Economic Nexus: Proceed with Caution
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Entering the Economic Nexus: Proceed with Caution

A recent motivator has left states clamoring to collect more in sales tax. The motivator? $24 billion in uncollected sales tax from ecommerce retail sales. Those states are also collectively facing $19 billion in budget shortfalls over the next year and a half. These are huge concerns for states, forcing them to become more creative and crack down over revenue source, and they’re now looking towards nexus.

Sales tax nexus requires a seller to register to collect and remit sales and use tax in a state based on having a “sufficient physical presence”. This definition, however, is played broad and loosely. The sufficient physical presence can be categorized as employing remote staff in the state, attending trade shows, warehousing inventory or using drop shippers or third-party fulfillment in that state. The most recent inclusion in the definition includes click-through nexus and affiliate nexus laws aimed at remote sellers.

Despite all these avenues to collect sales tax, it is not enough for states. Quill v. South Dakota, a monumental court decision establishing boundaries for nexus, is beginning to fade away as states pass legislation to counter its authority. In just the past few months, several states have put forth 40 bills in an attempt to overturn Quill.

A State Problem: An eroding sales tax base

While 17 states are expecting to see a budget deficit over the next year, they are choosing to take a different route than the traditional sales tax increase. Some states including, Alabama, South Dakota and Vermont, are turning to economic nexus as the answer. Economic nexus is based on a businesses’ sales revenue or transaction volume.

For example, Ohio imposed an economic nexus in 2005 for sales and use tax requiring any company with sales greater than $500,000 to collect and remit tax to the state. Similarly, Michigan does the same for $350,000 or more in receipts. A few other states have similar laws, while others are beginning to follow suit. Currently, 28 bills are awaiting approval in 13 states in regards to economic nexus for sales and use tax.

Unfortunately, the sales threshold for economic nexus can be low. In South Dakota, the economic nexus sits at $100,000 in annual sales or 200 separate transactions of any dollar value. Alabama, although slightly higher at $250,000, includes a provision for intent to conduct business through advertising.

Overall, businesses’ are gaining nexus through these laws without any physical connection to the state.

A Seller Problem: multi-state compliance

So, how does this affect sellers? More compliance issues. To add to the already burdensome regulations businesses with multi-state nexus need to deal with, such as ensuring point of sale, ecommerce systems and shopping carts are set up to calculate the correct tax in each state and jurisdiction. Adding economic nexus creates even more jumps to hurdle for businesses who may not have had nexus in states previously. Considering how aggressive states have been about passing new nexus laws, it can be assumed they will be just as aggressive when it comes to enforcing audits.

Dealing with these new economic nexus laws will make manually managing sales tax borderline impossible. Learn more about economic nexus and why automating will become a reliable strategy by watching this quick video.

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