In the past few years, we’ve seen a record number of states pass new sales tax laws that have had a noticeable and costly impact on small and medium-sized businesses.
A US Supreme Court ruling in 2018 made it easier than ever for state governments to impose sales tax collection responsibilities on businesses of all sizes. With new legal precedent in place, states have felt comfortable passing laws that allowed them to collect taxes on sales made from out-of-state businesses, even if those businesses never set foot within their borders.
The Landmark Wayfair Decision
Generally, the Federal government gives states the freedom to set and enforce their own sales tax laws.
In 1992, the US Supreme Court established in Quill v. North Dakota that states could only impose their sales tax collection duties on businesses that had established a physical connection with the state.
This “physical presence” model held strong for decades, but states started to resist that model when internet sales became more popular. States found that they were losing valuable sales tax revenues when out-of-state (or “remote”) businesses sold goods online to their residents. The main argument against Quill was that remote businesses were capitalizing on states’ markets without paying taxes for the privilege to do so.
In 2018, the US Supreme Court overturned Quill, upsetting legal precedent that had been held for 25 years. In South Dakota v. Wayfair, the courts determined that physical presence was not a requirement for a state to impose its sales tax filing responsibilities on a remote business.
The Aftermath of Wayfair
The ruling in Wayfair was significant, but on its own, it didn’t change any state laws. It simply gave states the permission to reimagine how they defined nexus. Nexus is the minimal connection needed for a state to impose its tax laws on a business.
South Dakota was one of the first states to set what is now known as an economic nexus standard for sales tax. In South Dakota, a remote business that lacks a physical connection to the state will still have sales tax nexus if they do one (or both) of the following:
- Make at least $100,000 of sales annually to South Dakota
- Complete over 200 separate transactions annually to South Dakota
Today, all but just a handful of states have adopted similar economic nexus standards. Let’s look at the economic nexus laws in just a few of the nearby states:
Economic Nexus Threshold
|KANSAS||$100,000 in sales||July 1, 2021|
|NEBRASKA||$100,000 in sales or 200 separate transactions||April 1, 2019|
|IOWA||$100,000 in sales||January 1, 2019|
|ILLINOIS||$100,000 in sales or 200 separate transactions||October 1, 2018|
|ARKANSAS||$100,000 in sales or 200 separate transactions||July 1, 2019|
|MISSOURI*||$100,000 in sales||January 1, 2023|
*Prior to January 1, 2023, Missouri does not claim sales/use tax jurisdiction on the basis of economic nexus. Effective January 1, 2023, use tax will be collected from out-of-state retailers who sell and deliver more than $100,000 in tangible goods to consumers in Missouri annually.
What Does This Mean for Business Owners?
If your business sells across state lines, you should take a close look at your multistate activity. You may need to start filing sales tax returns and collecting sales tax in other states.
Although you won’t be paying for the tax yourself — sales tax is charged to the consumer, not the seller — you may find that the compliance itself is quite costly. Setting up a new system or purchasing a software that calculates, collects, tracks, and reports sales in more than just your home state could be resource intensive. But failing to comply could also be costly; if you fail to collect and remit taxes appropriately, you may be on the hook for paying that tax out of pocket.
There’s no need to do this alone. If you want or need help understanding your sales tax filing requirements, MarksNelson can perform a nexus study to get a better idea of your tax exposure. Together, we can figure out how the Wayfair decision and subsequent state tax law changes will impact your business.
If you want to discuss the Wayfair decision and your cross-border sales, reach out to us today.