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How Wayfair Impacts Sales Tax Registration

Nov 2nd 2018
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Economic nexus will soon be in effect in 27 states and your business clients making sales into multiple states need to be ready to register to collect taxes as soon as nexus is triggered.

Unfortunately, determining when economic nexus has been established in a state is complicated by the fact that there’s little uniformity between jurisdictions. And once established, the process for getting things rolling (i.e., registering to do business) varies from state to state.

Prior to the Supreme Court issuing its ruling in South Dakota v. Wayfair, Inc. (June 21, 2018), states could only tax sales by businesses with a physical presence in the state. Wayfair changed that long-standing rule. The court found the respondents’ “economic and virtual contacts” with South Dakota to be a sufficient basis for a tax collection obligation (nexus).

For economic nexus, a business establishes an obligation to collect and remit sales and use tax by its economic activity in a state. Generally, states look at the volume of sales or the number of transactions during a particular time frame, usually (but not always) the current or preceding calendar year. In South Dakota, the threshold is gross sales of $100,000, or 200 or more transactions in the state.

Economic Nexus Lacks State-by-State uniformity

While the thresholds in the majority of economic nexus states are $100,000 or 200 transactions, that’s not the case in all states: In Georgia it’s $250,000 or 200 transactions, in Minnesota it’s 10 or more sales totaling more than $100,000 or 100 retail sales, and so on.

Furthermore, the threshold in some states is based on tangible personal property only, while in others it includes services and in some it includes electronically transferred property. The threshold is comprised of taxable and exempt sales in some states but only taxable sales in others. To top it off, some states simply haven’t said what they will do, but once nexus has been established, businesses may need to act fast.

Economic Nexus Can Be Established at Any Time

Consider Illinois, where economic nexus went into effect on October 1, 2018. Remote sellers must ascertain at the end of each quarter whether they’ve met one of the state’s economic nexus thresholds during the preceding 12-month period. If they have, they’re required to register and commence tax collection and remittance at the start of the subsequent quarter — which could be the next day.

The Illinois Department of Revenue provides the following example: At the end of March 2019, a remote seller determines it made $200,000 in sales to Illinois purchasers for the preceding 12-month period. As a result, it’s required to register to collect and remit tax on sales to Illinois purchasers from April 1, 2019, through March 31, 2020. On March 31, 2020, the cycle starts again.

A seller with unexpectedly strong sales in Illinois at the end of a quarter could find itself with an unexpected obligation to collect and remit tax in a matter of days.

Registering in a New State

Before a business can collect and remit tax in a state where it’s developed economic nexus, it must first obtain a sales tax permit (also called seller’s permit). With economic nexus spreading like gossip, businesses may develop a tax collection obligation in multiple states at the same time.

Finding exactly what each state requires and properly setting up shop in a state takes time. Some businesses have the resources to handle the task from start to finish, others have fuller plates. Rest assured, economic nexus is changing the world of retail.

Replies (3)

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By mack380acp
Nov 6th 2018 18:29 EST

You end the article with "Rest assured, economic nexus is changing the world of retail."...

Going from a business that travels in-state from craft fair to craft fair is limiting and going online to establish an ecommerce website seems to be the right step to take, but since Wayfair and this nexus tax issue has been brought to my attention, how can I "rest assured" that this is a good thing?
Most of my waking hours are spent making items to sell. Now, having to take a week or more to register with different states (presumably needing individual tax IDs for each tax district) how on earth is this something I should rest assured over?
What this appears to be doing is prohibiting me from entering the online commerce industry altogether. My profit margins are just enough to supplement my disability income - meaning "not very much" and one simple mistake in filing some local tax could land me bankrupt or worse.
The fact that there is no consistency in nexus rules makes every transaction a potential legal liability for tax problems.
I get that you are writing to a more established business community, but for very small businesses or startups, this ruling is a death knell to even step foot in the online marketplace and that will land me permanently on the disability dole - my goal is to be able to have gainful income and get off and away from disability - the only way that could happen is to branch out to online sales... but this time and effort to stay on top of individual state and local taxes across the US is more than I can handle - hence "How is this a good thing" and how could this be something to "Rest assured"?
South Dakota v. Wayfair has destroyed any chance for me to become self-sufficient and will be the death of my business before it has a chance to launch beyond local craft fairs.

Thanks (1)
Replying to mack380acp:
By skinnyvinny
Nov 7th 2018 15:42 EST

Good post, I agree completely. The new nexus rules seem like a license to print cash for those accounting firms specializing in this area, and a nightmare for everyone else. Unfortunately, most small businesses lack the funds to pay the fees for such services, and don't have the time and background to tackle it on their own.

Thanks (2)
Replying to skinnyvinny:
By mack380acp
Nov 8th 2018 14:55 EST

I've spent the last two days (and parts of nights) continuing to try to figure this out... I have searched high and low and STILL have no answer as to "do I need a tax ID for each state"?
"Will I be sending out 46 tax forms every quarter (or year) even if my income from that state is $0 just to cover my rear?"
You are correct - it seems that this is great news for tax accountants and the states, but small, one employee (who is also the owner) businesses are going to be destroyed if they venture online.

Thanks (1)