Sales Tax Compliance for Remote Sellers: What Economic Nexus Means for You

WHAT IS SALES TAX ECONOMIC NEXUS?

Economic nexus refers to a connection between a business and a state that is created through economic activity in that state.

Traditionally, sales tax obligations were closely associated with physical presence. A business might have an office, warehouse, employee, or other physical connection to a state.

That approach changed significantly with the U.S. Supreme Court's 2018 decision in South Dakota v. Wayfair, Inc.

The Court held that a physical presence was not necessarily required for a state to require certain remote sellers to collect sales tax.

Following the decision, states adopted or expanded economic nexus rules for remote sellers.

Today, a business can potentially have a sales tax obligation in a state because of the volume or value of its sales into that state.

WHAT DID THE WAYFAIR RULING CHANGE?

The Wayfair ruling sales tax discussion comes from the Supreme Court's 2018 decision in South Dakota v. Wayfair, Inc.

The case involved South Dakota's law requiring certain sellers without a physical presence in the state to collect and remit sales tax when they exceeded specified sales or transaction thresholds.

The Supreme Court concluded that the physical presence rule from earlier cases was no longer required under the circumstances presented in the case.

The decision did not create one nationwide sales tax threshold for every business.

Instead, states developed their own economic nexus rules.

That distinction is important.

A business cannot simply learn one state's threshold and assume the same rule applies everywhere. The applicable rules depend on the state, the type of sales, the measurement period, and other factors.

WHO IS A REMOTE SELLER?

A remote seller is generally a business that does not have a physical presence in a state but sells products or services for delivery into that state.

For example, imagine an online retailer based in Texas that sells products to customers in California, Florida, New York, and other states.

The company may not have stores or offices in those states. However, its sales into those states can still create economic nexus if the applicable state threshold is met.

Remote sellers can include:

• Ecommerce businesses
• Online retailers
• Manufacturers selling directly to consumers
• Businesses selling through their own websites
• Some service providers
• Businesses selling through online marketplaces

Whether a particular sale creates a tax obligation depends on the laws of the state involved and the type of product or service being sold.

HOW DO ECONOMIC NEXUS THRESHOLDS WORK?

Economic nexus thresholds are generally designed to measure a business's economic activity in a particular state.

However, the calculation is not necessarily the same in every state.

Some states use a sales threshold. Others have historically used both sales and transaction thresholds, while some states have changed or removed transaction thresholds over time.

The measurement can also differ.

A state may look at:

• Gross sales
• Retail sales
• Taxable sales
• Gross receipts
• The number of transactions
• A combination of these measures

This means a business should not assume that its total company revenue is the number that matters.

The relevant question is usually:

How much qualifying economic activity did the business have in each particular state under that state's current rules?

For example, a business could have $1 million in nationwide sales but only a portion of those sales may be relevant to a particular state's threshold calculation.

At the same time, certain states may include sales that a business might not expect when determining whether it has crossed a threshold.

The Streamlined Sales Tax Governing Board notes that states differ in how they calculate economic nexus thresholds, including whether they use gross sales, retail sales, or taxable sales.

WHY REMOTE SELLER SALES TAX CAN BECOME COMPLICATED

The basic concept sounds simple.

Sell enough into a state and you may have to collect sales tax.

The challenge is that a growing business may sell into many states at the same time.

Imagine an online business with customers in 25 states.

The company may need to monitor:

• Sales by state
• Transaction counts
• Product taxability
• Customer locations
• Economic nexus thresholds
• Registration requirements
• Sales tax rates
• Filing frequencies
• Exemption documentation
• Marketplace sales
• Changes to state rules

This creates an ongoing compliance process rather than a one-time calculation.

A business that does not meet a threshold today could cross it later as sales increase.

FIVE COMMON SALES TAX MISTAKES REMOTE SELLERS MAKE

1. Assuming No Physical Location Means No Sales Tax Obligation

This is one of the biggest misconceptions about remote selling.

A business may operate entirely from one location and still have sales tax responsibilities in other states.

Economic nexus rules were created in part to address sales by businesses without traditional physical presence.

2. Using One Threshold for Every State

There is no single rule that applies to every state.

Thresholds, measurement periods, definitions, and registration requirements can differ.

For example, current state guidance published by the Streamlined Sales Tax organization shows different thresholds and calculation rules across states.

A business should therefore review each state separately.

3. Waiting Until Tax Season

Sales tax is not something that should be reviewed only when preparing an annual income tax return.

A business can have sales tax registration and filing responsibilities throughout the year.

Monitoring sales regularly gives the business more time to determine whether it has crossed a threshold and what steps may be required.

4. Forgetting About Marketplace Sales

Many businesses sell through marketplaces in addition to their own websites.

Marketplace facilitator laws can affect who is responsible for collecting and remitting sales tax on marketplace transactions.

That does not necessarily mean the seller can ignore its sales tax obligations entirely.

The treatment of marketplace sales and other sales can vary by state, so businesses should review the applicable rules instead of assuming all marketplace activity is automatically excluded.

5. Registering Without Understanding the Filing Requirements

Registration is only one part of sales tax compliance.

Once a business becomes registered, it may have ongoing filing and remittance responsibilities.

The Streamlined Sales Tax organization notes that remote sellers may need to calculate tax, file required returns, remit tax, and respond to notices or audits depending on their registration and state requirements.

WHAT SHOULD REMOTE SELLERS TRACK?

A good sales tax compliance process starts with accurate information.

At a minimum, businesses selling across state lines should consider tracking:

Sales by state

Know where customers are located and how much revenue is being generated in each state.

Transaction volume

If a state uses transaction-based rules, the number of transactions can matter.

Product or service taxability

Not every product or service is necessarily taxed in the same way.

Customer exemptions

Maintain appropriate exemption documentation when applicable.

Marketplace sales

Separate marketplace activity from direct sales when necessary for compliance analysis.

Registration status

Keep a record of where the business is registered and what filing requirements apply.

Filing deadlines

Missing a filing deadline can create unnecessary penalties, interest, or notices.

A PRACTICAL WAY TO REVIEW YOUR ECONOMIC NEXUS POSITION

Remote sellers can make the process more manageable by reviewing their sales state by state.

Start with a list of all states where customers have purchased from the business.

Then review the following for each state:

• 1. What type of products or services are being sold?
• 2. Does the business have a physical presence there?
• 3. What is the current economic nexus threshold?
• 4. What measurement period does the state use?
• 5. Which sales count toward the threshold?
• 6. Has the business crossed the applicable threshold?
• 7. Does the business need to register?
• 8. When does collection begin?
• 9. How frequently must returns be filed?
• 10. Are marketplace sales treated differently?

This process can reveal obligations that may not be obvious from looking at total company revenue.

WHAT HAPPENS AFTER YOU CROSS AN ECONOMIC NEXUS THRESHOLD?

Crossing a threshold does not mean a business should simply start adding tax to every invoice without reviewing the applicable rules.

The business may first need to determine whether registration is required and when its collection responsibility begins.

It may then need to:

• Register with the state tax authority
• Configure its invoicing or ecommerce system
• Determine applicable tax rates
• Apply tax to taxable transactions
• Maintain exemption documentation
• File sales tax returns
• Remit collected tax
• Monitor future changes

The exact requirements depend on the state.

This is why a sales tax review should happen as part of normal business operations rather than after a compliance problem appears.

ECONOMIC NEXUS IS AN ONGOING RESPONSIBILITY

One important point for growing businesses is that economic nexus is not necessarily a one-time question.

A business may be below a threshold one year and above it later.

Sales patterns can change quickly, particularly for ecommerce businesses.

A new product launch, seasonal promotion, expansion into a new market, or large increase in online sales can change the company's state-by-state tax position.

Regular reviews can help businesses identify these changes earlier.

WHEN SHOULD YOU GET PROFESSIONAL HELP?

Sales tax compliance can become difficult when a business sells across many states or experiences rapid growth.

Professional support may be useful when:

• Your business sells in multiple states
• You recently experienced significant sales growth
• You are unsure whether you have economic nexus
• You need to register in additional states
• You have missed sales tax filings
• You received a state tax notice
• You sell through multiple marketplaces
• You are unsure which sales count toward a state's threshold
• Your business is expanding into new states

A tax professional can help review the facts, identify potential compliance requirements, and organize the information needed for the next steps.

FINAL THOUGHTS

For remote sellers, sales tax compliance is no longer only about where a business has a physical location.

Sales tax economic nexus can create responsibilities based on a business's economic activity in a state, even when the business operates from somewhere else.

The Wayfair decision was an important turning point, but it did not establish one uniform set of rules for every state. States have their own thresholds and requirements, and those rules can change over time.

If your business sells to customers across state lines, reviewing your sales by state can help you understand where potential obligations may exist.

Need help reviewing your business's sales tax compliance? Schedule a tax compliance consultation with CBA Financials to discuss your situation and determine what areas may need attention.