All states, except Alaska, Delaware, Montana, New Hampshire, and Oregon, maintain statewide sales taxes as a crucial revenue source. While Alaska does not have a statewide tax, its localities are permitted to implement and collect sales taxes. The landscape of state sales tax collection underwent a significant change following the Supreme Court’s 2018 decision in South Dakota v. Wayfair. This decision eliminated the requirement for sellers to have a physical presence in the taxing state to collect and remit sales taxes, thereby expanding states’ abilities to collect sales taxes from e-commerce and other remote transactions.
Following the Wayfair decision, states quickly began requiring out-of-state marketplace facilitators and remote sellers to collect and remit sales taxes. This change impacted both large and small sellers, increasing compliance obligations that often disproportionately fall on small- and medium-sized sellers. The increased compliance costs are further compounded by the lack of uniformity among the various taxing jurisdictions.
Currently, 25 states limit economic nexus to sales meeting a dollar threshold, such as $200,000. Others, however, require that marketplace facilitators and remote sellers collect and remit sales taxes if either a dollar threshold is met or the seller conducts a certain number of transactions in the state. This can be quite burdensome, as compliance costs associated with collection and remittance requirements could be greater than the business transacted. For example, a seller with sales in Arkansas exceeding $100,000 is required to collect and remit sales tax. The same seller would also be subject to collection and remittance obligations if the seller conducted 200 or more transactions in the state, even if the total revenue was dramatically less than the $100,000 sales threshold.
Nineteen states limit their economic threshold determinations to dollar amounts alone. This is imperfect but certainly better than requiring the smallest online businesses to collect and remit sales tax. Connecticut and New York do not impose an obligation to collect and remit sales tax unless the remote seller or marketplace facilitator meets or exceeds both a sales and transactions threshold.
The Wayfair court was correct in highlighting the changing nature of the economy and the necessity for sales tax codes to adapt. However, the decision did little to define how states should require sales tax collection and remittance from marketplace facilitators and remote sellers. As a result, there is a frustrating lack of uniformity among the states, which creates inefficiencies disproportionately borne by small and mid-sized sellers.
States should reform their marketplace facilitator and remote seller rules and remove the transaction threshold altogether. Indiana recently became the latest state to make the switch, a positive and pro-growth tax reform that others should follow. Reforming economic nexus thresholds would not only be better for businesses but for states as well. It is more cost-effective for states to focus on—and simplify—compliance for a reasonable number of sellers than to impose rules that have low compliance and are costly to administer.