Local economic nexus requirements complicate remote sales tax compliance

States won the right to tax remote sales when the Supreme Court of the United States overturned a longstanding physical presence requirement with South Dakota v. Wayfair, Inc. (June 21, 2018). Today, every state with a sales tax has an economic nexus law requiring out-of-state sellers with a certain volume of sales in the state to register then collect and remit sales tax or other taxes.

Although the Wayfair decision doesn’t address local tax obligations, local taxing jurisdictions in a handful of states now have local economic nexus requirements. These include Chicago, Illinois, many Louisiana parishes, and some jurisdictions in Colorado.

In an information bulletin issued January 21, 2021, the Chicago Departments of Finance and Law explain how the home-rule authority allows them to enforce economic nexus at the local level. As of July 1, 2021, some remote retailers may have a requirement to register and file returns with the Chicago Department of Finance — in addition to registering with the Illinois Department of Revenue and remitting sales tax to the state.

Like the state of Illinois, Chicago provides safe harbor for businesses selling beneath a certain economic threshold. The state’s threshold is $100,000 or 200 transactions. Chicago’s economic nexus threshold is “$100,000 in revenue from Chicago customers during the most recent consecutive four calendar quarters.”

Businesses meeting or exceeding the $100,000 threshold in Chicago must register to collect and remit the following taxes:

• Chicago’s amusement tax on amusements delivered electronically (e.g., audio or video streaming services and online games)
• Chicago’s personal property lease transaction tax on nonpossessory computer leases

Safe harbor from Chicago economic nexus is contingent upon a remote vendor having “no other significant contacts with Chicago,” such as a physical presence in Chicago or advertising directed at Chicago consumers.

An out-of-state business must register with the Chicago Department of Finance within 60 days of establishing economic nexus with Chicago, and start collecting Chicago taxes within 90 days. Out-of-state vendors must continue collecting and remitting Chicago taxes for at least 12 months, even if their sales drop beneath the Windy City’s $100,000 threshold.

According to the information bulletin, “Whether the City has the authority to require a given business to collect its taxes is a combined question of law and fact.” Any business unsure of their tax obligations should reach out to the Chicago Departments of Finance and Law, which are “happy to discuss individual cases with any businesses or its authorized representatives.”

Businesses have challenged a local jurisdiction’s right to tax remote sales in the past. Yet even before Wayfair, in Mulligan v. Dunne (1975), the Illinois Supreme Court held that a home-rule unit can require an Illinois seller based outside of its boundaries to collect taxes. “Mulligan recognized that business activity directed at customers within a home-rule jurisdiction is enough to justify imposing a tax collection obligation on a seller.”

Louisiana can be particularly challenging for sales tax compliance for both remote retailers and for in-state businesses selling throughout the Pelican State. As the Louisiana Department of Revenue notes, there are “significant differences” between the state sales and use tax and sales taxes levied and collected by political subdivisions, “especially in regard to exemptions and suspensions of exemptions.”

In-state businesses are required to register with the Louisiana Department of Revenue and their local taxing authority. If they sell to consumers located in other parishes, they need to register with the tax authorities in those jurisdictions and collect applicable local sales taxes in addition to the state tax. They must remit the state sales tax to the Louisiana Department of Revenue and local sales taxes to the appropriate local tax authority.

Remote businesses are required to collect and remit state and applicable local sales and use taxes if they meet or exceed Louisiana’s economic nexus threshold, which is $100,000 in sales or 200 transactions in the state in the current or previous calendar year. As of this writing, remote sellers should register with the Louisiana Sales and Use Tax Commission for Remote Sellers instead of registering with the Louisiana Department of Revenue.

The Commission explains in its Frequently Asked Questions, “Louisiana’s sales tax system is unique in that state and local governments each collect their own sales tax and provide for their own exclusions, exemptions, and deductions.” The Commission has created jurisdictional codes to help remote sellers determine the “exact rate of state and local sales and use tax to collect as well as if the rate is reduced in part or full because of an exemption or exclusion.”

This seems straightforward enough, if less so than in most other states. Yet there are hidden complexities, such as the distinction between direct marketers, remote retailers, and remote sellers. Each “has a separate legal meaning in Louisiana” and distinct sales and use tax obligations.

What is a direct marketer?

A direct marketer is a seller with no physical presence in Louisiana that sells beneath the state’s economic nexus threshold. A direct marketer may opt to voluntarily collect and remit sales tax at a single combined rate of 8.45% for all sales into the state, but they have no legal obligation to do so. Should a direct marketer develop economic nexus, it must register as a remote seller with the Louisiana Sales and Use Tax Commission for Remote Sellers. The Louisiana Department of Revenue and the Commission will give such sellers guidance.

The single 8.45% combined rate isn’t open to sellers that have nexus with Louisiana, whether economic or physical in nature.

What is a remote retailer?

A remote retailer is an out-of-state seller that does not have economic nexus with Louisiana but does have cumulative annual gross receipts exceeding $50,000 into Louisiana per calendar year (including sales by affiliates).

According to the Commission, a remote retailer that “voluntarily registers, collects, and remits” tax on its Louisiana sales is “relieved from the reporting requirements of LA R.S. 47:309.1,” more commonly known as Louisiana’s non-collecting seller use tax reporting requirements. Remote retailers are eligible for the single 8.45% combined rate.

What is a remote seller?

A remote seller is a business that has met or exceeded Louisiana’s economic nexus threshold of $100,000 or 200 transactions in the current or previous calendar year. Having economic nexus, remote sellers must register to collect and remit all applicable state and local sales taxes based on the location of the consumer.

Remote sellers are required to collect and remit state and local sales and use tax “based upon actual applicable bases and rates.” They cannot collect and remit the single combined rate of 8.45%.

Local sales taxes in Louisiana are administered by local tax jurisdictions. To help streamline compliance for remote sellers, the Sales and Use Tax Commission for Remote Sellers “has compiled the state and local sales and use tax bases and rates and will provide this information on its website.”

There are approximately 70 home-rule municipalities in Colorado. Some have adopted local economic nexus requirements, although the Colorado Municipal League’s Model Ordinance on Economic Nexus and Marketplace Facilitators urges municipalities to “not adopt” economic nexus at the local level unless they join the state’s single point of remittance portal (SUTS).

The Colorado Municipal League (CML) explains: “The risk of a lawsuit under the United States Commerce Clause if you were to enforce economic nexus without the single point of remittance is high. Using the single point of remittance portal and uniform language will assist in lessening that risk” — though it won’t remove it entirely.

In a separate but related issue, Colorado’s Sales and Use Tax Simplification Task Force is working to eliminate multiple business licensing fees for remote sellers. If Senate Bill 22-032 becomes law, local taxing jurisdictions would be prohibited from charging a fee for local general business licenses to remote retailers with a state-issued retail license starting July 1, 2022. And as of July 1, 2023, local taxing authorities would need to “automatically issue a general business license to such a retailer.” Home-rule municipalities wouldn’t be able to require remote retailers to apply separately for a local business license.

Despite the efforts of the CML and the Sales and Use Tax Simplification Task Force, Boulder established an economic nexus standard for remote sellers effective October 1, 2021. It uses the same economic nexus threshold as the state; the difference is that remote retailers must register with and remit tax to the city. Other home-rule municipalities may do the same; some haven’t adopted the Model Ordinance on Economic Nexus and Marketplace Facilitators or agreed to join the state SUTS.

The clock is ticking: All remote retailers will be required to collect and remit Colorado sales and use tax at the rate in effect at the point of delivery starting October 1, 2022.

On the eve of Wayfair’s fourth anniversary, state and local governments are still grappling with their (relatively new ability) to tax remote sales. It’s a big deal for them. It’s an even bigger deal for businesses with remote sales tax obligations.

You can find state-specific information about economic nexus laws in our state-by-state guide to economic nexus laws. If you think you may have developed economic nexus with one or more states, consider taking a free economic nexus assessment.

Cover photo by Canva