If you operate a business, you’ve probably heard people talk about “economic nexus” when they’re discussing state sales taxes. However, what does it actually mean and how does it affect your business? Economic nexus, to put it briefly, is the amount of activity in a state that causes firms from other states to be required to pay sales tax.
Physical presence was the criterion for assessing whether a firm had to collect and pay sales tax in a given state prior to the Supreme Court’s 2018 ruling in South Dakota v. Wayfair. Nevertheless, the Court’s decision allowed states to enact economic connection legislation based on variables including sales volume, transaction volume, or a mix of both.
43 states will have economic nexus legislation in place by 2021, with various thresholds and specifications. For instance, Illinois mandates that out-of-state sellers who complete 200 transactions or at least $100,000 in sales in the state collect and remit sales tax. The current sales tax rate in Naperville, an Illinois city, is 7.5%, which comprises the state rate of 6.25% and a municipal rate of 1.25%. The total sales tax rate in Evanston, another city in Illinois, is 8% due to a higher municipal rate of 1.75% in addition to the identical state rate of 6.25%.
It’s crucial for businesses to stay current on the most recent regulations in each state where they have economic nexus because sales tax rates and obligations can vary over time. For instance, the state rate in Illinois increased in 2020 from 6.25% to 6.3%, and certain local rates also altered. Finally, it’s important to note that although though economic connection is a requirement at the state level, some online transactions are subject to federal sales tax regulations. By 2021, the Marketplace Fairness Act would compel online retailers who make more than $100,000 in sales or engage in 200 transactions with customers in areas where they don’t have a physical presence to collect and remit sales tax.
In conclusion, enterprises that sell across state lines must increasingly take their economic nexus into account. It’s critical for businesses to be educated and assure compliance with state and federal regulations given the expansion of economic nexus laws and the potential for changes in sales tax rates and requirements.