Economic nexus definition
/What is Economic Nexus?
Economic nexus refers to a tax connection established when a business earns income or conducts a certain level of economic activity within a state, even without physical presence there. This concept gained prominence after the U.S. Supreme Court’s 2018 South Dakota v. Wayfair decision, which allowed states to impose sales tax obligations based on sales volume or transaction count alone. Typically, a threshold economic activity level is used to determine whether economic nexus exists. Once that threshold is met, the business must register, collect, and remit sales tax to that state.
What is the Economic Nexus Threshold?
A common threshold value is that sales tax remittances are required when an out-of-state seller’s sales into a state exceed $100,000 or 200 sales transactions within a calendar year. Some states, such as Texas and California, set much higher thresholds, making it easier for small businesses to sell into these states. It is an open question as to how low a state can go in setting economic nexus thresholds, since very low thresholds make it more difficult for small businesses to administer sales tax withholdings.
Given the administrative difficulty of paying sales taxes in some areas, it would be reasonable to expect many sellers to avoid making these payments. The result is reduced sales tax receipts for those governments making the payment process more difficult for sellers.
Why is Economic Nexus Used?
The economic nexus concept is used to ensure that businesses generating significant revenue from customers in a state contribute to that state's tax base, even if they have no physical presence there. It addresses the growth of e-commerce and remote sales, which previously allowed many out-of-state sellers to avoid collecting sales tax. By applying tax obligations based on economic activity, states can protect local businesses from unfair competition and recover lost revenue needed to fund public services. This concept promotes tax fairness and reflects the modern digital economy, where physical location is no longer the sole driver of market reach.
Impact of Economic Nexus
The ramifications of economic nexus are clearly more administrative work for mid- to large-sized companies that sell across state lines (such as any Internet business). This is not especially difficult when a state provides sellers with a consolidated application and administration system, but this is not always the case – some states have quite a disorganized approach to economic nexus, requiring sellers to make separate filings with individual cities and counties. Calculating sales tax is a particular concern in the latter case, where a seller may have to deal with hundreds or even thousands of different sales tax rates. Sellers should consult individual state sales tax rules to see if they are liable for sales tax remittances under the economic nexus concept.