Nexus Monday: A day of sales tax reckoning

Update 10.9.2018: Nevada's economic nexus law took effect October 1, 2018. Businesses that established economic nexus on October 1 must register with the state and commence collection and remittance on November 1, 2018.

Update 10.1.2018: Economic nexus in New Jersey has been delayed. It will take effect November 1, 2018.

Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, North Dakota, Washington, and Wisconsin. In these states, many businesses will have to start collecting and remitting sales and use tax on October 1, 2018. A day Bloomberg BNA has dubbed “Nexus Monday.”

It’s a fitting moniker, evoking Black Friday and Cyber Monday. Nexus Monday doesn’t promise basement prices for customers or record-breaking profits for sellers. For these 10 states, it’s a day of reckoning for non-collecting retailers.

The shift from physical presence to economic nexus

Not so long ago, states could only tax sales by businesses with a physical presence in the state, such as a brick-and-mortar store. However, on June 21, 2018, the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. States now have the authority to tax remote sales.

This is a big deal for states, many of which are eager to take advantage of this new freedom. Yet there is also a whiff of caution in the air. The Supreme Court repealed the physical presence rule without replacing it with a similar bright-line test. With little guidance on how remote sales can and can’t be taxed, most states are reluctant to stray too far from the economic nexus model that triggered the repeal of the physical presence rule in the first place.

The Supreme Court did praise three aspects of South Dakota’s sales tax system that appeared “designed to prevent discrimination against or undue burdens upon interstate commerce”:

• Small seller exception: To trigger nexus, remote sellers must have more than $100,000 in gross revenue from South Dakota sales, or 200 or more transactions for delivery into the state in the current or previous calendar year
• Prospective enforcement: No obligation to remit the sales tax may be applied retroactively
• Sales tax simplification: South Dakota is a member of the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance costs

Many states have taken the above under consideration when crafting their own economic nexus laws, as revealed below.

Small seller exception

21 of 27 states with an economic nexus law adopted thresholds similar to South Dakota’s. Of the 10 states with economic nexus laws taking effect on Nexus Monday, eight use South Dakota’s $100,000/200 transactions threshold:

• Illinois
• Indiana
• Kentucky
• Maryland
• Michigan
• North Dakota
• Washington
• Wisconsin

Two states have a different threshold:

• Alabama: more than $250,000 and certain additional activities
• Minnesota: 10 or more retail sales totaling more than $100,000, or 100 or more retail sales

No retroactive enforcement

All 10 Nexus Monday states will enforce economic nexus on a prospective basis only. Thus, remote retailers won’t be held liable for tax on sales made into the states prior to October 1, 2018. Forgiveness may not apply for sales occurring after October 1.

Streamlined Sales Tax (SST)

Only three of the 10 Nexus Monday states are not SST member states: Alabama, Illinois, and Maryland.

Alabama offers a Simplified Sellers Use Tax Remittance program for certain remote retailers; eligible sellers collect, remit, and report a flat 8 percent sellers use tax on their sales into the state, rather than variable combined state and local tax rates.

Maryland has no local sales and use taxes, which greatly simplifies sales tax compliance for remote sellers.

On the other hand, collecting and remitting sales tax in Illinois can be complicated. Non-collecting retailers that trigger economic nexus at the end of a quarter must register with the state and commence collection and remittance on the first day of the following quarter. In addition, the state has different sales tax rates for different transactions. Fortunately, remote retailers with no physical presence in the state aren’t required to collect or remit local taxes — generally. 

In the SST member states, remote retailers can register through the SST program. The organization has partnered with a handful of certified service providers (CSP) that provide automated sales tax software solutions to SST-registered businesses, making multistate compliance easier and more affordable.

Nexus Monday will be a big day for many retailers, but it won’t be the last of its kind. As of this writing, economic nexus is set to take effect in five states on January 1, 2019. Between Nexus Monday and that day (Tax Tuesday?), it will come online in six others. Furthermore, economic nexus will almost certainly take effect in most remaining states in the first half of 2019.

Where do you have economic nexus? Check out our state-by-state guide to sales tax economic nexus rules.