Key takeaways
- Wayfair reshaped sales tax rules: Businesses must now collect and remit tax based on economic nexus, not just physical presence.
- Thresholds vary by state: Most follow the $100,000 or 200-transaction rule, but others like California and New York set higher or dual thresholds.
- Proactive compliance prevents penalties: Regularly monitoring nexus status with expert and tech support helps businesses avoid costly fines and audits
Sales tax rules have recently changed and are likely affecting your clients—here’s what you need to know to better serve them.
The 2018 Wayfair ruling set the stage for states to begin taxing remote sales based on economic nexus. Now, having a physical presence in a state is no longer the only qualifier for collecting sales tax. Advisors and CPAs need to know how sales tax rules have changed and what those changes mean for their clients in order to better serve them. Having a thorough understanding of sales tax rules can help accountants save their clients from fees and penalties that may come from sales and use tax noncompliance.
From Physical Presence to Economic Nexus
If businesses sell using an e-commerce platform, they’re responsible for determining when they trigger economic nexus in a state, registering with the state, and collecting and remitting sales tax on sales in that state. Depending on the jurisdiction, economic nexus can be established either by having a certain number of transactions in a state or exceeding a dollar amount of revenue from sales in that state.
Because each state has its own economic nexus criteria, identifying whether economic nexus has been established is easier said than done. It’s a lot of work that takes careful attention and time. This creates a significant compliance risk for remote sellers that could cause tax-related problems and penalties down the road.
Monetary and Transactional Thresholds Have Changed
After the Wayfair ruling, the threshold that determines whether or not a business has economic nexus in a jurisdiction changed. Now, most states follow South Dakota’s economic nexus threshold, requiring remote sellers with sales of $100,000 or more or over 200 separate transactions to pay taxes. Some states have alternative thresholds, though keep in mind that these are liable to change yearly:
- Arizona’s threshold is $100,000 in sales with no minimum transaction volume
- California’s threshold is $500,000 in sales with no minimum transaction volume
- New York’s threshold is $500,000 in sales AND 100 transactions
It’s critical for online business owners–even if they only dabble in e-commerce in addition to their brick-and-mortar business– to know whether or not they qualify for physical nexus, economic nexus, or both. It’s easy for businesses to get confused, especially if they aren’t perfectly organized and sell online in multiple states. The best way for businesses to be sure about their nexus status is to work with an accountant or tax advisor. Working with a professional can help save companies from fines and penalties that may result from noncompliance.
Fines and Penalties
Businesses that aren’t compliant with economic nexus laws could be subject to fines, penalties, and sales tax audits from multiple jurisdictions. Companies should monitor their status on a quarterly basis because some states implement nexus throughout the year, not just annually.
A failure to file can be unintentional, but it’s common, despite being easily avoided. Ignoring or dismissing nexus rules can result in civil and criminal statutes. Civil statutes mainly apply to a failure to file and a failure to pay. A failure to file and failure to pay are considered two separate violations, so businesses can potentially end up with two penalties ranging from 1 to 25 percent of the sales tax they owe—which can be sizable. Finally, criminal penalties can occur if a company fails to pay taxes with the clear intent of evading payment, or if sales tax has been collected but not remitted to the respective jurisdictions.
Delivering SUT Compliance to Clients
Fines and penalties can easily be avoided by businesses if they are willing to learn how to become sales and use tax compliant, but navigating the myriad of sales tax laws across every taxing jurisdiction is resource-intensive and unnecessarily burdensome. The patchwork of rules, rates, exemptions, forms, and filing deadlines can make manual compliance a full-time job.
With the right advisor and technology, it’s easier for companies to remove a substantial part of the sales tax compliance burden. LumaTax makes it easy for CPAs and advisors to deliver SUT compliance profitably and at scale. Our software identifies whether or not nexus has been reached and how to move forward in the best way.
Frequently asked questions
What changed after the Wayfair ruling?
The 2018 South Dakota v. Wayfair decision allowed states to tax remote sales based on economic nexus, even if a business has no physical presence in the state.
What is economic nexus?
Economic nexus is established when a business exceeds a state’s sales or transaction threshold—typically $100,000 in sales or 200 transactions, though thresholds vary by state.
Which states have different thresholds?
Examples include California ($500,000 in sales, no transaction minimum) and New York ($500,000 in sales and 100 transactions). Businesses must review each state’s criteria individually.
What are the penalties for noncompliance?
Businesses that fail to register, collect, or remit sales tax may face civil or criminal penalties—ranging from 1–25% of unpaid tax—and even audits across multiple jurisdictions.
How can advisors help clients stay compliant?
By regularly monitoring nexus status, advising on state thresholds, and using automation tools like LumaTax to streamline multi-state compliance and prevent costly errors.
