States Jump on Economic Nexus Bandwagon, But Questions Remain

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On June 21, 2018, the Supreme Court issued its decision in South Dakota v. Wayfair, overturning the longstanding physical presence requirement for sales and use tax nexus. Now, under Wayfair, a state can require a company to collect and remit sales or use tax on the basis of the company’s economic or virtual presence in the state.

The South Dakota law at issue in Wayfair requires a seller to collect tax if its gross revenue from the sale of tangible personal property, products delivered electronically, or services delivered into the state exceeds $100,000 or if the seller sold such items for delivery into the state in 200 or more separate transactions. In striking down the physical presence requirement, the Court stopped short of specifically upholding South Dakota’s economic nexus law, leaving the door open for further challenges to economic nexus regimes under the Due Process and Commerce Clauses, particularly as applied to small sellers.

The prospect of a future legal challenge seems not to have affected the pace at which states are embracing economic nexus. Since June 2018, every state that imposes a sales or use tax has adopted an economic nexus policy or has proposed legislation to do so. Yet the implementation of these policies varies from state to state. Do nontaxable or exempt sales count toward the thresholds? Is there a grace period for collection or reporting after passing the threshold? And how do the thresholds interact with increasingly common marketplace facilitator laws?

Which Sales Count?

Most states have adopted the thresholds used in South Dakota—more than $100,000 of sales into the state or 200 or more transactions for delivery into the state. (A few states have adopted a higher dollar-amount, impose only a revenue-based threshold, or require that remote sellers meet both the revenue- and transaction-based thresholds.) These commonalities, however, are a mirage; the consistency quickly disappears upon closer examination. For example, some states base the threshold on gross receipts from all sales into the state, regardless of whether a sale is taxable, whereas some look to taxable sales only or to another metric.

To illustrate these issues, consider South Carolina and Illinois. A remote seller will establish nexus in South Carolina if its gross revenue from sales into the state during the measuring period exceeds $100,000. This calculation includes taxable and exempt retail sales of tangible personal property, wholesale sales of tangible personal property, sales of products transferred electronically (regardless of whether they are subject to tax), and sales of services (again regardless of whether they are subject to tax). In Illinois, in contrast, the $100,000 threshold is based on gross receipts from sales of tangible personal property (both taxable and exempt), excluding sales for resale. Thus, a seller that makes $50,000 of in-state wholesale sales and $60,000 of in-state retail sales would meet the threshold in South Carolina but not in Illinois. In both states, a seller making only wholesale sales into the state does not need to register and collect the tax, since the seller is not engaged in making any retail sales.

Multichannel sellers also need to determine how marketplace facilitator laws interact with the seller’s economic nexus thresholds. Typically, thresholds are based on in-state sales through all channels, but some exceptions may arise if the seller makes sales only through marketplace facilitators that collect the applicable sales or use tax in the state.

Registration and Collection Deadlines

States have adopted a variety of measuring periods to calculate the thresholds. Most states have opted to look at the current and/or prior calendar year, but some measure based on a rolling twelve months of activity or examine the prior twelve-month period each quarter. Further, once the threshold has been passed, when does the seller need to register and actually begin collecting tax and filing returns?

In Iowa, for example, sellers must register as soon as they pass the threshold and begin collecting sales tax on the first day of the next calendar month at least thirty days after passing the threshold (e.g., a seller passing the threshold on March 15 would need to begin collecting on May 1). In contrast, in Wisconsin a seller must begin collecting tax on its 200th transaction or the next transaction after meeting the revenue-based threshold.

Note that many states have offered special grace periods or penalty waivers for the first few periods of implementation post-Wayfair.

Marketplace Facilitator Policies

In the year since Wayfair, an overwhelming majority of states have enacted or proposed policies that require so-called “marketplace facilitators” to collect tax on third-party sales through their platforms. Each state has crafted its own criteria for what activities cause a platform to be considered a marketplace facilitator—typically some combination of listing or advertising third-party products for sale and then facilitating those sales through fulfillment, payment processing, or handling of returns. In some cases, these policies tie marketplace collection requirements to economic nexus thresholds (e.g., a marketplace without an in-state physical presence does not need to collect tax if it has less than $100,000 in gross receipts from its own and facilitated sales into the state). Meanwhile, states continue to pursue marketplaces for tax collection on third-party sales under the theory that the marketplace is the true seller in these transactions.1

Physical Presence Still Reigns Supreme

In the deluge of new economic nexus and marketplace facilitator laws, it’s important to remember that nexus can still be established through physical presence in a state, regardless of the seller’s in-state gross receipts or transactions. Since the thresholds are measured periodically, a small seller may have a collection obligation based on economic nexus in one year that is suspended in a later year due to de minimis activities during the later measuring period. However, if the seller moved inventory or sales personnel into the state in the meantime, it would still have physical presence nexus in that later year. Sellers, especially those below or at the margin of the economic nexus thresholds, should continue to carefully evaluate the impact of establishing a physical presence in a state.

Melissa A. Oaks, J.D., LL.M., is a proposition manager for indirect tax at Thomson Reuters.


  1. See, e.g., Arizona Transaction Privilege Tax Ruling 16-3 (09/20/2016); New York TSB-A-19(1)S (03/07/2019); Amazon Services, LLC v. South Carolina Department of Revenue, No. 17-ALJ-17-0238-CC; and Normand v. USA LLC, 18-CA-211 (12/27/2018).

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