Start the Year Reviewing Your Economic Nexus Thresholds
The beginning of the calendar year is an important time for businesses to review sales to determine if new economic nexus thresholds have been surpassed based on prior-year sales. Most states require sales tax collection to begin immediately when a seller meets the thresholds, thus emphasizing the importance of tracking sales. Other states provide grace periods, but these windows vary greatly, from 30 days to several months after thresholds are met.
What is Economic Nexus?
When the Supreme Court ruled in the South Dakota vs. Wayfair case in June 2018, economic nexus became the newest issue facing companies across the United States. States now have the right to collect sales tax from out-of-state sellers with no physical presence in the states if those sellers have created an economic presence. This economic nexus is established when remote sellers meet each state’s thresholds for number of transactions in the state and/or sales into the state. Here is a list of Economic Nexus Requirements by State.
What is an Economic Nexus Threshold?
States follow varying evaluation periods to determine if a seller has reached an economic nexus threshold. Most states use the seller’s sales figures from the previous and/or current calendar year. Some states, such as Alabama and Florida, only use the previous year’s sales numbers as the evaluation period. Other states use different evaluation periods, such as a rolling 12-month basis.
When to Start Collecting Sales Tax
Best practice is to register and begin collecting sales tax as soon as economic nexus has been created. This helps the seller avoid creating exposure for any periods where nexus existed, but sales tax was not collected.
Remember, physical presence nexus will always take precedence over economic nexus. Besides owning or leasing a physical location in a state, physical presence nexus can also be created through an employee working in a state, storing inventory in a state (even if stored/sold through a separate company such as Amazon), attending a trade show, or having employees visit a state for sales visits or product training. Even a minimal amount of visits into a state can create physical presence nexus.
The sales tax professionals at Cherry Bekaert can assist in identifying your physical and economic nexus footprint and determining if economic nexus thresholds have been surpassed.
