New Jersey and Utah Are Latest States to Consider Reforming Economic Nexus

It comes as little surprise to anyone following state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy that New Jersey has significant room to grow in terms of competitiveness. The Garden State currently ranks 49^th on our State Tax Competitiveness Index, sandwiched between California (48) and neighboring New York (50). All three share the distinction of being net-outmigration states, losing residents and businesses to states like Florida and Texas, both ranking in the top 10 of the Index.

Further compounding the state’s woes is the real specter of a significant fiscal shortfall in the years ahead, making sweeping tax reform difficult. In the search for additional revenue, lawmakers have looked to unsound policies. For example, the state sunset a corporate surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. only to see it revived (for years 2024-2028) almost immediately, though amended to only apply to the largest businesses in the state and rebranded as a “corporate transit fee.” Nevertheless, the policy remains uncompetitive, sends the wrong signal to the market, and creates a lack of stability for businesses that had planned on the surtax ending.

Utah, by comparison, ranks 16^th overall and inside the top 20 in all categories of the Index except the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. (27) and unemployment insurance taxes (29). Despite stark competitiveness differences, both New Jersey and Utah share a common goal this legislative session: reforming economic nexus rules that require out-of-state sellers and marketplace facilitators to collect and remit state sales taxes (New Jersey bill, Utah bill).

Prior to the Supreme Court’s 2018 decision in South Dakota v. Wayfair, only sellers with a physical presence in a state could be required to collect and remit state sales taxes. States sometimes got creative through ideas like “click-through nexus” or “cookie nexus” to circumvent the restriction. The Wayfair court, however, recognized the changing nature of the economy and the rise of e-commerce and overturned decades of precedent, allowing states to begin taxing non-resident businesses selling into the state. New Jersey and Utah, like every other state with a sales tax, quickly adopted new economic nexus rules, requiring any remote seller or marketplace facilitator conducting $100,000 in sales or 200 or more transactions into the state to collect and remit sales taxes.

Counting transactions as an alternative means to create collection and remittance obligations unfairly impacts small and medium-sized sellers. For example, a marketplace facilitator or remote seller with sales into either state exceeding $100,000 is required to collect and remit sales tax. However, the same seller would also be subject to collection and remittance obligations if it conducted 200 or more transactions in the state (regardless of the dollar amount of sales). To put a finer point on this, selling 200 of the same item at a price of $5 for a total of $1,000 would be sufficient to require the seller to comply with New Jersey and Utah sales tax collection and remittance rules, even though the total revenue was dramatically less than the $100,000 sales threshold. This hypothetical seller would almost certainly incur more costs to comply with the law (e.g., specialized software to track sales, accounting services, etc.) than they receive in profits on these sales, making doing business in these states less appealing.

Other states have learned this lesson and have already removed the transactions threshold from economic nexus. Most recently, Indiana and Wyoming did so, meaning that more than 20 states now disregard the total number of transactions when determining economic nexus. New York and Connecticut uniquely require sales tax collection and remittance if both the sales and transactions thresholds are met. This, at least, absolves small dollar sellers from sales tax obligations.

New Jersey and Utah lawmakers are right to remove the transactions threshold from state economic nexus rules. Tax competition remains important, and this reform would provide relief to small and medium-sized remote sellers without squeezing state coffers. For Utah, the reform reinforces its competitive standing. For New Jersey, it may not be the sweeping reform the state needs, but it is one it can afford and would be a good start for future efforts.

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