Could 2023 bring the end of economic nexus transaction thresholds?

Businesses with no physical presence in South Dakota currently need to register for South Dakota sales tax if they have more than $100,000 in gross sales or at least 200 separate transactions in the state in the current or previous calendar year. Starting July 1, 2023, the 200-transaction threshold is eliminated.

South Dakota led the charge to tax remote sales: A legal battle over its 2016 economic nexus law resulted in the repeal of the physical presence requirement for sales tax in 2018, freeing all states to tax remote sales. (Physical presence in a state continues to be a sales tax nexus trigger.) 

The 200-transaction threshold will be cut from South Dakota’s economic nexus requirements due to the enactment of Senate Bill 30. However, South Dakota isn’t the first to remove the transaction threshold because eight states already have.

The following states have already eliminated their economic nexus transaction threshold:

South Dakota will join this list July 1, 2023, when its transaction threshold is no longer in effect. 

These 13 states never created a transaction threshold in the first place:

Though the needle does seem to be moving toward sales tax simplification for remote sellers, plenty of complexity remains. 

Broadly speaking, there are six different categories of economic nexus thresholds:

• $100,000 (17 states)
• $100,000 or 200 transactions (23 states, Puerto Rico, and the District of Columbia)
• $100,000 and 100 transactions (one state)
• $250,000 (two states)
• $500,000 (two states)
• $500,000 and 100 transactions (one state)

Some thresholds include only taxable sales of tangible personal property (TPP); others are based on gross sales, meaning even businesses that only make exempt sales can also establish economic nexus. Thresholds in some states include services in addition to TPP. 

Selling through a marketplace adds another layer of complexity, because some thresholds include sales made through a marketplace that collects and remits tax on behalf of the seller, while others don’t.

Finally, states base thresholds on a variety of different time periods:

• The prior or current calendar year
• The prior calendar year
• The preceding 12 months
• The preceding four calendar quarters
• The preceding four sales tax quarters
• Other

For businesses, especially businesses selling a variety of products into numerous states, figuring out where and whether nexus exists is a difficult, time-consuming task. Furthermore, businesses must be prepared to start collecting sales tax as soon as they cross an economic nexus threshold, as required in at least 13 states and the District of Columbia.

No wonder sales tax experts (and businesses) are calling for increased simplification and uniformity.

“The biggest burden on small businesses and remote sellers is lack of uniformity and consistency between all the states,” Diane Yetter, President of Sales Tax Institute, told the United States Senate Committee on Finance on June 14, 2022. “States should make every effort to reduce unnecessary complexity and variations of law that create avoidable burdens on sellers.” 

The transaction threshold is particularly burdensome for small businesses, according to Yetter: “A third of our clients with sales under $50,000 in a state in the last year were required to register solely by exceeding the 200-transaction threshold.”

Yetter praised the states that have recognized — and removed — “the undue burden of the 200-transaction threshold,” and she encouraged other states to do the same. “Uniformity of economic thresholds, definitions, and compliance will have the greatest impact on reducing the burdens on small businesses and remote sellers.”

If South Dakota or any other states decide to eliminate their economic nexus transaction thresholds, the Avalara Tax Desk will let you know. In the meantime, here’s what you need to know about nexus.

This post was updated March 20, 2023, to reflect the enactment of SB 30.