Wayfair and Economic Nexus for Sales Tax

What changed

South Dakota's law applied to sellers with more than $100,000 of sales or 200 transactions in the state. The Supreme Court upheld the law. Nearly every state with a sales tax has since adopted economic nexus, though thresholds vary, and many have dropped the transaction count.

Marketplace rules

States also adopted marketplace facilitator laws, which make platforms responsible for collecting tax on third-party sales. Sellers still need to check whether marketplace sales count toward their own thresholds, and whether they must register for direct sales.

What sellers should do

Track sales and transactions by state. Review the measurement period each state uses, as well as what sales it counts. Register before collecting tax, and confirm the taxability of each product.

Sellers with past exposure can consider a voluntary disclosure agreement, which often limits the lookback period and penalties. Nexus can be created in states where a seller has never set foot.

Why the case matters

Before 2018, Quill Corp. v. North Dakota meant that a state could generally require collection only from sellers with physical presence. Online sellers could ship into a state without collecting tax, and buyers rarely paid use tax themselves.

South Dakota v. Wayfair overturned that rule. The Court pointed to features that limited the burden in South Dakota, including a safe harbor for small sellers, no retroactive collection, and membership in the Streamlined Sales and Use Tax Agreement.

How thresholds differ

The most common test is $100,000 of sales in the state, but some large states use higher figures. Some states look at gross sales, some at taxable sales, and some at retail sales only. Measurement periods also differ. Some use the current or prior calendar year, and others use the prior twelve months or quarters.

Exempt and wholesale sales may count toward a threshold in some states, so a wholesaler that thinks it has no exposure may still need to register. Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Alaska has local sales taxes, and many Alaskan jurisdictions have adopted their own remote seller rules.

A worked example

An online retailer in Texas sells $3 million a year, with $140,000 to customers in Ohio and 900 small orders to Georgia worth $80,000. It passes Ohio's sales threshold, so it registers there. Whether Georgia applies depends on that state's current test, which may look at sales or transactions.

Once registered, the seller charges the correct rate, files returns, and remits tax. It keeps exemption certificates for any exempt customers. Registering only for one state does not create obligations in others.

Handling past exposure

A seller that crossed a threshold in earlier periods may owe uncollected tax out of its own pocket. It usually cannot recover the tax from past customers. Exposure should be quantified by state and period.

A voluntary disclosure agreement can limit the lookback period, often to three or four years, and usually waives penalties. Eligibility often requires that the state has not already contacted the seller, so timing matters. Registering first can sometimes remove the option, so get advice before registering if there is significant history.

Local complexity

Colorado, Alabama, and Louisiana have notable local or home-rule features. Most states charge a destination-based rate for remote sellers, which means a seller must track thousands of jurisdictions. Sales tax software is therefore common once a business has more than a few registrations.

Sales tax nexus does not automatically create income tax nexus, but many states apply a similar economic approach to income tax. A complete review should look at both.

A preparer's checklist

Export sales by state, by transaction count, and by channel for the past several years. Compare them with each state's current threshold and measurement period, and note the date nexus began.

Check whether products are taxable in each state, and whether registration is required before the first taxable sale. Review marketplace activity and exemption certificates, then decide whether to register or seek a voluntary disclosure.

Finally, set up a filing calendar and review the thresholds at least quarterly, because a growing seller can cross a new one at any time.

Frequently asked questions