Economic nexus thresholds explained: State-by-state insights

State-by-state economic nexus is one of the biggest considerations for remote sellers – and made even thornier because states’ threshold rules coast to coast seem simply chaotic.

That sense of chaos isn’t completely off the mark, but there are some standards, guidelines and definitions remote sellers that can rely on.

What is ‘economic’ nexus?

Before the Supreme Court’s Wayfair v. South Dakota decision seven years ago, most companies in most states had no nexus unless they had offices or employees there, aka “physical” nexus. Wayfair changed that when the High Court decided that states could mandate that remote sellers collect and remit sales tax once those companies had sold enough in a state.

Economic nexus thresholds in many states still depend on two numbers. Almost all states with a statewide sales tax opted to have economic nexus triggered by a threshold of dollar volume of sales or quantity of sales over a period, usually 12 months immediately prior.

Some states opted for both thresholds; Connecticut, for instance, is one state that still includes both volume and quantity of sales. Most states set the economic nexus threshold at a dollar figure in annual sales of taxable products and, in some states, services.

The above thresholds aren’t static. Arizona is among states that have lowered their initial post-Wayfair threshold. Some states’ thresholds are also a little higher. Alabama and Mississippi have $250,000 thresholds, for example, while California, Texas and New York mandate sales tax obligations at $500,000 in annual sales.

In general, we recommend that if your company had $100,000 in revenue in a state during a 12-month period or 200 separate transactions in annual sales, you should seriously explore whether you have economic nexus in that state. We also recommend that companies look at their revenue quarterly to stay ahead of sales tax obligations that, if ignored, could ignite audits.

Nothing’s simple

Unfortunately, the above thresholds aren’t the whole story when trying to determine economic nexus.

In states where only taxable sales are used to determine economic nexus, understanding if your products and services are taxable is the first part of the equation. You also need to know if any of your customers are exempt from sales tax: Exemptions are statutory exceptions eliminating the need for your retailer to collect sales tax on transactions with that customer.

Most states also determine their threshold numbers by gross taxable sales. States with an economic nexus threshold that don’t include gross sales have included Alabama, Arkansas, Colorado, Minnesota and Oklahoma.

And if you’re one of the growing number of companies that sell through a marketplace facilitator such as Amazon, you’re engaging a sales platform that, although it generally handles the sales tax obligation for you, may give you nexus in more states than you realize. (Some of the latest states to institute marketplace facilitator laws are Illinois and Kansas.) This becomes especially important in a gross-receipts state that has sales tax laws for both marketplace facilitator and economic nexus.

In the good news department, more states are eliminating their transaction thresholds. (Thirteen economic-nexus states never had such thresholds, which experts have since cited as a special burden on small sellers.) South Dakota recently ditched its transaction threshold, joining California, Colorado, Iowa, Louisiana, Maine, North Dakota, Washington and Wisconsin. Utah’s goes this summer. This is particularly good news for companies that sell products via subscription, as each payment and shipment in a subscription could potentially count toward nexus thresholds.

Nexus is the first key to determining your sales tax obligations – and it’s complex and ever-changing.

Let TaxConnex manage the burden of keeping up with all the changes and challenges that come with staying compliant in this post-Wayfair world. Contact us to learn what it means when sales tax compliance is all on us.