Angélica Serrano Román

This article was originally published in Bloomberg Tax.

A growing number of states, responding to complaints that their sales tax requirements for remote retailers are too burdensome, are taking steps to ease that pain.

More states are modifying their economic nexus thresholds—the criteria used to determine whether a remote seller has established an economic connection with the state—by moving away from the requirement for remote sellers to begin collecting and remitting sales tax after reaching a set number of transactions.

Among the states to do so this year is South Dakota, which created a precedent for economic nexus thresholds with its landmark win in South Dakota v. Wayfair Inc., the 2018 case that empowered states to tax remote sales regardless of a retailer’s physical presence. Economic nexus is established when sellers exceed a specified threshold—either a dollar amount or number of transactions, or both—after which they must register, collect, and remit sales taxes to states.

While most states use only a dollar amount to establish sellers’ economic nexus, nearly half of the states still incorporate transaction or sales counts in their calculations, despite concerns from some practitioners and business groups that this mandate disproportionately impacts retailers with low-dollar transactions, forcing them into tax compliance with a state even when revenue there is minimal. The transaction count is typically set at 200 transactions—following South Dakota’s model upheld in Wayfair—except for New York, where it stands at 100 sales.

That means that if a remote seller of $0.50 widgets makes 200 sales in a state, that business would only have a total sales of $100, but would still be obligated to calculate, collect, and remit the sales tax on those transactions.

States that have eliminated the transaction count requirement are California, Maine, Washington, Colorado, Massachusetts, Wisconsin, Iowa, North Dakota, Louisiana, and South Dakota. Another 13 states never adopted a transaction threshold in the first place. Five states have no sales taxes, though Alaska allows localities to tax remote sales under an economic nexus that includes $100,000 in sales or 200 transactions.

“I think the reason why this change has been slow is that it has been no more than five-and-half-years, which is very short in sales tax law, since the first state that adopted economic nexus,” said Scott Peterson, vice president of US tax policy and government relations at Avalara, a certified service provider that handles sellers’ sales and use tax functions. “Up until now, there hasn’t been a focused effort to change anything about economic nexus.”

The Wayfair ruling did not specify the metrics or dollar amounts for establishing a connection to a state and when that tax collection should start. Following South Dakota’s lead, more than half of the states adopted a similar approach, asking merchants to collect sales taxes if they conducted more than 200 transactions or reached $100,000 in gross revenue from sales.

Lucy Dadayan, a principal research associate with the Urban-Brookings Tax Policy Center, said instituting standardized rules across all states would bolster compliance while easing the burden on businesses.

“These thresholds are complex and vary significantly from state to state. Each state has its unique definition of what constitutes a transaction, encompassing various factors such as type, venue, and timeline, which adds to the complexity of compliance in this regard,” she said.

Streamlined’s Best Practice

Craig Johnson, the executive director of the Streamlined Sales Tax Governing Board, an organization overseeing a 24-state agreement aimed at simplifying state tax codes, said it would take time for most states to remove the transaction count from their economic nexus laws since many will require legislative action.

Johnson explained that after states initially implemented their economic nexus laws, they became aware of situations where businesses with a high volume of low-dollar transactions were required to remit minimal amounts of sales tax, which, for some, was “an unintended consequence of the law.”

During the board’s semi-annual meeting in May—in South Dakota—Streamlined adopted a “best practice” or guideline for states, suggesting they eliminate the transaction threshold from their nexus calculations. More state legislation to that effect is expected in 2024.

“Although several state legislatures had already adjourned by that time, it’s anticipated that when state legislatures convene next year, several will consider proposals to remove the number of transactions threshold,” Johnson said.

Tax Compliance Costs Outpace Tax Collection

Louisiana dropped the 200-transaction count from its economic nexus laws starting in August, under a bill (H.B. 171) signed by Gov. John Bel Edwards (D) in May.

Before lawmakers passed the bill—which also modified the state’s economic nexus threshold for marketplace facilitators—state officials were sued in 2021 by Halstead Bead Inc., a wholesaler of jewelry and craft supplies located in Prescott, Arizona. The company argued in its legal challenge, filed at the U.S. District Court for the Eastern District of Louisiana, that the state’s remote sales tax structure was unconstitutionally restrictive and complex.

A district judge ruled the case should be heard in state court rather than federal court. The Fifth Circuit affirmed that decision July, but by that point, Louisiana had updated its economic nexus laws.

“States are just copying the original South Dakota legislation, but now that the trend is moving away from that, including in South Dakota, hopefully, states will drop it,” said Joseph Bishop-Henchman, executive vice president of the National Taxpayers Union Foundation, who also represented Halstead Bead in its case against Louisiana.

“The shortest way a state legislator can avoid a lawsuit similar to the one we had in Louisiana is to delete that transaction threshold,” Bishop-Henchman said.

Brad Scott, Halstead Bead’s finance director, estimated spending more than $428,000 to fulfill sales tax obligations in all the states where the company has established nexus since the Wayfair decision. These expenses include sales tax software, legal services, monthly fees from certified service providers, and labor costs.

“We don’t have a collection obligation to South Dakota, because we don’t hit the threshold there, but I still have to manage exemption certificates for every transaction that goes to South Dakota just in case one day we do exceed their threshold,” Scott said.

Halstead currently has nexus with 20 states, and has reached nexus with 34 states at some point in time since Wayfair, the company said. In all but two, California and Washington, it has spent money on tax compliance that exceeds its actual tax collections, Scott said.

“We have more work to do, but the movement has been very good this past year,” Bishop-Henchman added. “It’s like the phrase ‘the juice isn’t worth the squeeze,’ but in this case, on retailers with 200 transactions but less than $100,000 in sales, or whatever the dollar threshold may be.”

Photo: Nicky Loh/Bloomberg via Getty Images