Understanding and Calculating Economic Nexus Thresholds for Sales and Use Tax

While a few states such as Hawaii and Vermont already have active economic nexus provisions in place for sales and use tax, remote sellers are anxiously working to comply with a number of states whose economic nexus provisions go into effect on October 1, 2018.

The states of Alabama, Illinois, Indiana, Kentucky, Michigan, Minnesota, New Jersey and Wisconsin all have laws that go into effect on October 1 for remote vendors meeting certain economic thresholds. As such, it is critically important for remote sellers to understand and calculate the thresholds correctly to ensure they are properly registered and filing sales tax returns in the required jurisdictions. All of the above states, with the exception of Alabama and Minnesota, use thresholds of $100,000 in sales or 200 individual transactions.  However, not all states calculate their thresholds in the same way.  

For instance, most of the states use an annual figure, such as the previous or current calendar year’s sales. If you are a remote vendor who exceeded either of $100,000 in sales or 200 individual transactions in 2017 or 2018, you will need to register and begin collecting sales tax in the following states by October 1, 2018: Indiana, Kentucky, Michigan, New Jersey and Wisconsin.  

Illinois and Minnesota calculate their thresholds a little differently, they use the 12- consecutive-month rule. In Illinois, remote sellers at the end of September will need to calculate their thresholds for the past 12 months to see if they exceed the $100,000 in sales or 200 individual transactions thresholds. When calculating the thresholds for Illinois, remote vendors are not to include sales for resale, sales from out of state that require registration with an Illinois agency (motor vehicles, trailers, aircraft, watercraft, etc.) or occasional sales.  

If remote sellers have met the threshold for the past 12 months in the period ending September 30, 2018, they must register and begin collecting sales tax on October 1, 2018. For remote vendors not meeting either threshold, they must perform the same calculation at the end of the next quarter to see if they exceed either of the thresholds for the 12- month period ending December 31, 2018. Remote sellers meeting either threshold must begin collecting sales tax on the first of the following month (January 1, 2019); those who do not meet either threshold must repeat the process at the end of the following quarter (March 31, 2019). Once the threshold has been met, vendors must register and begin filing returns for at least one year before they can perform the threshold calculations again to see if they still have an economic presence and nexus with Illinois.

Minnesota uses a straight 12-month period for its threshold calculation. As such, remote vendors not meeting the thresholds will have to calculate each month to make sure that they are not approaching the state’s 10 or more transactions totaling $100,000 or 100 or more individual transactions. 

Remote sellers should not assume that all states using the same or similar economic thresholds calculate their thresholds the same way. Remote vendors should check the respective state’s rules to make sure they understand what the economic nexus standard is and how the thresholds are calculated. If you have any questions regarding the proper calculation of a particular nexus threshold, you should consult with your state and local tax professional.