New Jersey and Utah Explore Reforms to Economic Nexus Rules

New Jersey and Utah are the latest states to consider revising their economic nexus policies, which dictate when out-of-state sellers and marketplace facilitators must collect and remit state sales taxes. This move comes as both states aim to address challenges in their tax systems, though their starting points and motivations differ significantly.

New Jersey, currently ranked 49th on the State Tax Competitiveness Index, faces ongoing struggles with tax competitiveness. Sandwiched between California (48th) and New York (50th), the Garden State is part of a trio of high-tax states experiencing net outmigration, with residents and businesses relocating to more tax-friendly states like Florida and Texas. Compounding these issues, New Jersey is grappling with a looming fiscal shortfall, making comprehensive tax reform difficult. In their search for revenue, lawmakers have resorted to questionable policies, such as reviving a corporate surtax under the guise of a “corporate transit fee.” While the surtax now applies only to the largest businesses, it undermines the state’s competitiveness and creates uncertainty for businesses that had anticipated its expiration.

In contrast, Utah ranks 16th overall on the Index and performs well in most categories, except for sales tax (27th) and unemployment insurance taxes (29th). Despite its relatively strong standing, Utah is joining New Jersey in reevaluating its economic nexus rules. Both states are considering legislation to reform these rules, which were established following the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair. That ruling overturned the long-standing physical presence requirement, allowing states to impose sales tax obligations on remote sellers based on economic activity within their borders.

Recognizing this issue, more than 20 states have already eliminated the transaction threshold from their economic nexus rules. Indiana and Wyoming are among the most recent to do so, while New York and Connecticut have adopted a unique approach, requiring sales tax collection only if both the sales and transaction thresholds are met. This at least spares small-dollar sellers from unnecessary obligations.

By removing the transaction threshold, New Jersey and Utah would align themselves with a growing trend aimed at reducing burdens on smaller businesses. For Utah, this reform would further bolster its competitive edge. For New Jersey, while it may not solve the state’s broader tax competitiveness challenges, it represents a step in the right direction—a modest but meaningful change that could pave the way for more comprehensive reforms in the future.

In an era where tax competition plays a crucial role in attracting businesses and fostering economic growth, these reforms could provide much-needed relief to small and medium-sized sellers without significantly impacting state revenues. For both states, the proposed changes signal a recognition of the need to adapt to the evolving economy and support businesses navigating the complexities of interstate commerce.

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