Are states getting rid of transaction thresholds?
by December 1, 2021
Updated June 2023
The Greek philosopher Heraclitus once said that “change is the only constant,” and even though he wasn’t talking about state sales tax (it was in 500 BCE, after all), it’s a statement that readily applies. Tax laws are constantly changing, and that’s especially true when it comes to economic nexus thresholds and sales tax compliance.
Ever since the Supreme Court ruled in South Dakota v. Wayfair that states have the right to require businesses to collect sales tax — even if they maintain no physical presence in a given state — e-commerce tax compliance got more complicated. After the ruling, states created economic nexus, which are thresholds for when a business is required to collect sales tax based on the total number of transactions or total revenue generated.
Some states are removing the transaction threshold
Over the past few years, multiple states have been reviewing the transaction threshold requirements for economic nexus, as there’s a sense they may not be fair to smaller sellers. While each state is different, it’s helpful to look at Colorado as an example of how states are viewing transaction thresholds — and subsequently changing sales tax legislation as a result.
In 2018, Colorado ruled that online sellers have an economic threshold of $100,000 per year in gross revenue, or a transaction threshold of more than 200 separate transactions in the previous or calendar year. (For a state-by-state guide of nexus rules, this guide is worth a gander.)
Colorado’s transaction threshold — and other states with similar thresholds — had the unintended consequence of creating an additional compliance burden for smaller businesses with plenty of transactions (200+), but who may have been selling lower cost items that didn’t add up to a significant stream of revenue. Without the transaction threshold, these same small businesses would not likely ever meet the yearly economic threshold of $100,000. If the purpose of the transaction threshold was to add additional sales tax proceeds to the state’s coffers, it didn’t appear to be working as planned.
That’s why Colorado removed its transaction threshold in April 2019. And they weren’t the only ones. California also removed its transaction threshold in 2019, and at the same time raised its economic threshold to $500,000. Four other states followed suit in 2019 — Iowa, Massachusetts, North Dakota and Washington. Effective in 2021, Wisconsin and Maine both removed their transaction thresholds.
In the summer of 2023, two more states have made plans to remove their transaction threshold: South Dakota and Louisiana. South Dakota will remove their threshold as of July 1, 2023, and Louisiana will remove their transaction threshold starting August 1, 2023. Keep in mind that some states require sellers to register and file even if they don’t meet certain thresholds, so it’s advisable to seek the help of a tax professional if you have specific questions.
Stay current on compliance
The laws surrounding economic and transaction thresholds change each year, so we’ve created a guide with the most up to date information on what you need to do to stay compliant. It includes not only important sales tax fundamentals, but also regulatory changes you’ll want to be aware of — and trends to be on the lookout for. You can find all that and more in our 2023 Sales Tax Preparedness Guide.
