LEGISLATIVE AND TECHNICAL AFFAIRS
Most States Now Require Remote Sellers to Collect Sales Tax
|Companies should assume that economic nexus is here to stay following last year’s South Dakota vs. Wayfair Supreme Court decision and plan accordingly. Nevertheless, for many small- and medium-size companies, there may be no sales tax exposure given current state tax thresholds.|
Companies without any physical presence in a state can now be required to collect sales tax based on their sales volume. In June 2018, the U.S. Supreme Court ruled in favor of a South Dakota state law requiring remote sellers to collect sales tax. (The term “remote” applies to internet, catalog and telephone sales, along with other types of transactions.) The court overturned the 1992 Quill decision, which required a physical presence to create “substantial nexus,” thereby allowing state sales tax collections.
A company can now have “economic nexus” in a state without otherwise having a physical presence. While granting South Dakota the right to require tax collections based on the volume of sales into the state, the court did not specifically rule on what amount of sales triggers an economic presence. Rather, it sent the South Dakota vs. Wayfair case back to a lower court to address the issue of whether the state law placed an undue burden on interstate commerce. The parties (Wayfair, Overstock and Newegg) then settled out of court in October 2018.
While the question of “undue burden” is technically unsettled, the Supreme Court ruling provided guidance when it deemed the South Dakota law as setting a sensible small-business safe harbor. The South Dakota law established a small-business exemption for retailers with less than $100,000 or 200 transactions in annual sales.
The court noted that the law provided small-business sellers with a reasonable exemption and prohibited retroactive collection. The court also observed that South Dakota is part of the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA is intended to address tax collection burdens by creating a single, state-level tax administration, simplified tax rates and tax returns, uniform definitions, a central electronic registration system for all member states, and the availability of free tax administration software. (There are currently 23 participating SSUTA states in addition to Washington, D.C. For more information, visit
Economic nexus for remote sellers is based on sales revenue or the number of transactions or both. Companies should assume that economic nexus is here to stay following last year’s Supreme Court decision and plan accordingly. The court decision has made it less likely that the U.S. Congress will address the issue through federal legislation.
States have been eager to collect sales tax revenues for years and have been quick to enact laws and update regulations following the court ruling. Since the court indicated that the thresholds set under the South Dakota law seemed reasonable ($100,000 or 200 transactions), many states have adopted the same thresholds or are setting higher levels.
How Should Companies Respond to the New
Developments Governing State Sales Tax?
First, does your company exceed the threshold for remote sales tax nexus? For most states, the threshold is relatively high: $100,000 or 200 transactions in annual sales. For many small and medium-size companies, there may be no exposure.
If your company does meet a state’s economic nexus threshold, should a company immediately register, collect and remit the taxes? Not necessarily.
For all companies, this is a time to step back and review all potential liabilities. For example, is there a chance that your company already had physical nexus and should have been collecting sales taxes due to the presence of a sales representative, a distribution or storage facility, or participation in a trade show? Some states also have economic franchise and other tax obligations. It is important to review the status of a company’s presence in a state before registering to collect sales tax.
Returning to the economic nexus threshold issue for remote sales, states may vary in how they are calculated. Revenues may be based on gross sales, retail sales or taxable sales. The number of transactions may encompass one agreement, multiple invoices, or monthly subscriptions. Each state will define when a taxable year has commenced when calculating whether the company is below or above the economic threshold. If a company is close to the exemption threshold for a specific state,
it should then review how the state calculates nexus.
All states have a formal or informal voluntary disclosure agreement (VDA) process for addressing tax liabilities. If a company determines that a tax exposure already exists but has not been paid, the company should take advantage of the VDA process since it limits the lookback period of tax liabilities (usually to three years), removes most if not all penalties, and sometimes reduces or eliminates interest. Caution: The VDA process is not always available once you have registered to collect sales tax, so there is an incentive for conducting a comprehensive tax-risk assessment before registering.
SEMA recommends that companies consult their accountant or tax professional regarding the issues raised.
The chart above shows the current out-of-state sales tax collection requirements, as of May 1, 2019 but please note that these requirements and still changing.
Current Out-of-State Sales Tax Collection Requirements, as of May 1, 2019:
|State||Sales tax collection start date||Exemption for Minimum Sales|
|Alabama||October 1, 2018||$250,000|
|Alaska||No Sales Tax|
|Arizona||Proposed||$100,000 or 200 transactions|
|Arkansas||July 1, 2019||$100,000 or 200 transactions|
|California||April 1, 2019||$500,000|
|Colorado||May 31, 2019||$100,000 or 200 transactions|
|Connecticut||December 1, 2018||$250,000 or 200 transactions|
|Delaware||No Sales Tax|
|District of Columbia||January 1, 2019||$100,000 or 200 transactions|
|Florida||Proposed||$100,000 or 200 transactions|
|Georgia||January 1, 2019||$250,000 or 200 transactions|
|Hawaii||July 1, 2018||$100,000 or 200 transactions|
|Idaho||June 1, 2019||$100,000|
|Illinois||October 1, 2018||$100,000 or 200 transactions|
|Indiana||October 1, 2018||$100,000 or 200 transactions|
|Iowa||January 1, 2019||$100,000|
|Kentucky||October 1, 2018||$100,000 or 200 transactions|
|Louisiana||Enforcement date TBD||$100,000 or 200 transactions|
|Maine||July 1, 2018||$100,000 or 200 transactions|
|Maryland||October 1, 2018||$100,000 or 200 transactions|
|Massachusetts||October 1, 2017||$500,000 or 100 transactions|
|Michigan||October 1, 2018||$100,000 or 200 transactions|
|Minnesota||October 1, 2018||10 transactions totaling $100,000 or 100 retail transactions (rising to 200 transactions on October 1, 2019)|
|Mississippi||September 1, 2018||$250,000|
|Missouri||Proposed||$100,000 or 200 transactions|
|Montana||No Sales Tax|
|Nebraska||January 1, 2019||$100,000 or 200 transactions|
|Nevada||November 1, 2018||$100,000 or 200 transactions|
|New Hampshire||No Sales Tax|
|New Jersey||November 1, 2018||$100,000 or 200 transactions|
|New Mexico||July 1, 2019||$100,000|
|New York||January 15, 2019||$300,000 or 200 transactions|
|North Carolina||November 1, 2018||$100,000 or 200 transactions|
|North Dakota||October 1, 2018||$100,000 or 200 transactions|
|Ohio||January 1, 2018||$500,000|
|Oklahoma||November 1, 2019||$100,000|
|Oregon||No Sales Tax|
|Pennsylvania||April 1, 2018||$100,000|
|Rhode Island||August 17, 2017||$100,000 or 200 transactions|
|South Carolina||November 1, 2018||$100,000|
|South Dakota||November 1, 2018||$100,000 or 200 transactions|
|Texas||January 1, 2019||$500,000|
|Utah||January 1, 2019||$100,000 or 200 transactions|
|Vermont||July 1, 2018||$100,000 or 200 transactions|
|Virginia||July 1, 2019||$100,000 or 200 transactions|
|Washington||October 1, 2018||$100,000 or 200 transactions|
|West Virginia||January 1, 2019||$100,000 or 200 transactions|
|Wisconsin||October 1, 2018||$100,000 or 200 transactions|
|Wyoming||February 1, 2019||$100,000 or 200 transactions|