The U.S. Supreme Court’s 2018 South Dakota v. Wayfair decision decided that states could require remote sellers to collect and remit sales tax on their in-state sales. Since that ruling states have relied on the original two types of economic nexus thresholds, or “tests,” to determine when a remote seller must begin collecting and remitting sales and uses taxes:
- A gross revenue test in which compliance is triggered after remote sellers exceed a specified amount of sales revenue generated in the state during a calendar year; and/or
- A transaction test in which compliance is required after the remote seller completes a set number (e.g., 200) of individual transactions.
If you look closely, you’ll see that I intentionally italicized the words “and” and “or” at the end of the first item above. That’s because some states require both thresholds to be surpassed before sales tax needs to be collected and remitted. In Connecticut, for example, a remote seller would need to surpass $100,000 in revenue and 200 transactions in a calendar year to be subject to sales tax compliance requirements. Most states with both types of tests only require one of the thresholds to be exceeded to trigger compliance requirements. However, “several states including Massachusetts, New York and Minnesota have revised their standard to an ‘OR’ test or dropped the transactions threshold entirely,” according to the Sales Tax Institute, which maintains this helpful state- by-state economic nexus guide.
At present, nine states have chosen to forgo their nexus transaction tests, including Louisiana (who phased out their 200-transaction nexus threshold on Aug. 1) and South Dakota (who eradicated theirs in July). This trend is a step in the right direction, particularly for smaller remote sellers that bear a larger compliance burden under post- Wayfair nexus rules. The U.S. Government Accountability Office (GAO) published research last fall showing that many remote sellers have diverted resources from business operations and investments to cover tax compliance costs. Other remote sellers have limited the number of states in which they sell to reduce their compliance burdens. In fact, this was among the key issues at the center of the recent Louisiana case of Halstead Bead, Inc. v. Lewis, 604 F. Supp. 3d 342, (E.D. La. 2022). As I noted in a previous article, the GAO report calls for a sales tax system that is equitable, efficient, straightforward and transparent.
We have a long way to go on that count, but another 2023 legislative change in Louisiana reflects a step toward increased efficiency and clarity. Act 375 (based on House Bill 558) calls for the Louisiana Uniform Local Sales Tax Board (LULSTB) to design, implement and maintain a single remittance system for state and local sales and use taxes. The legislation also adds two business representatives to the LULSTB’s advisory board.
An important point to note, the LULSTB’s stated mission is to “promote uniformity and efficiency in the imposition, collection and administration of local sales and use taxes.” All state and local tax jurisdictions should embrace, and execute, a similar mission. Further, we should also consider why states are removing their transactional economic nexus thresholds from their remote sales tax regimes and prepare for more to follow.
One fundamental answer can be found in optimizing the economic gains and benefits of tax revenue and extending effective and efficient administration. As the GAO report found, and some state studies have indicated, the transactional economic nexus method, is simply inefficient and not cost-effective. It burdens the smaller business taxpayer and lacks economic benefit and value. This inefficiency is particularly significant today, in the post-pandemic era of economic uncertainty that impacts both business and governments alike, although some economic resiliency remains.
In November 2022, the National Taxpayers Union Foundation, noted that nearly 50,000 remote businesses were out of compliance with Wayfair. The study recognized that compliance burdens are an existential threat to tens of thousands of small businesses and hundreds of thousands of American workers. Which therefore should provide legislators with the nudge they need to take meaningful action in reducing sales tax compliance burdens. Let us hope that this good policy fiscal trend continues to improve an already complex “taxing” system.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.