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Back in 2018, the U.S. Supreme Court released its opinion in South Dakota v. Wayfair, clearing the way for economic sales and use tax nexus.
The Wayfair case examined South Dakota’s legislation, which required a remote seller with no physical in-state presence to remit sales tax based on a sales and transaction threshold. Over 40 states joined in an amicus brief in the case supporting South Dakota, illustrating the interest in changing how nexus is determined.
The decision overruled the Court’s 1992 holding in Quill Corp. v. North Dakota, eliminating the physical presence requirement for establishing sales and use tax nexus in a state. Since the ruling, many states have followed South Dakota’s example in their statutes and rules, enacted their own thresholds, adopted economic and marketplace nexus by policy, or issued guidance.
With that in mind let’s look at the most common nexus thresholds post-Wayfair.
In general, most states copied South Dakota, assuming it would be a safe harbor. As a result, many states established an economic nexus threshold by reaching a certain dollar amount of sales (e.g., $100,000), with about half of the states combining this with a set number of sales transactions (e.g., 200 transactions).
States are revisiting their nexus rules as revenue sources are shifting and changes in the economic landscape are occurring, such as the rise of marketplace facilitators and the “gig” economy.
One of the biggest modifications to sales tax was adopted by Arizona, which has evolved into a Transaction Privilege Tax (TPT) imposed directly on the seller, with the option to pass this tax onto consumers. The tax is not based on individual transactions, but rather the “amount or volume of business transacted by persons on account of their business activities.” This approach resembles an income tax rather than a sales tax.
Another adjustment to monitor is the removal of the transaction threshold to reduce the compliance burden on small businesses; benefiting high volume, low dollar sellers who will no longer have a filing requirement. On the other hand, states are modifying regulations, including the expansion of taxing digital goods and services, subjecting more businesses and activities to sales tax compliance.
Another adjustment to monitor is the removal of the transaction threshold to reduce the compliance burden on small businesses; benefiting high volume, low dollar sellers who will no longer have a filing requirement. On the other hand, states are modifying regulations, including the expansion of taxing digital goods and services, subjecting more businesses and activities to sales tax compliance.
Having employees or contractors working remotely in a state, even temporarily, can trigger physical presence nexus. This includes situations where employees relocate or work from home in a different state than the company’s main office.
Setting up a booth or attending trade shows in a state, even for a short period, is often enough to create nexus. Many states consider this a business activity that establishes a taxable connection.
Sending salespeople or service technicians into a state—even for a single transaction or brief visit—can create nexus. Some states, like Oklahoma and Texas, have explicit rules that even one sale by a traveling salesperson establishes nexus.
Storing inventory in a third-party warehouse or fulfillment center (such as Amazon FBA) within a state can trigger nexus, even if the business has no other physical presence there.
Selling through online marketplaces (Amazon, eBay, Etsy) can create marketplace nexus. Some states count marketplace sales toward your economic nexus threshold, and you may still have filing obligations even if the marketplace collects tax on your behalf.
Having in-state affiliates who refer customers to your website or engage in digital advertising targeting residents of a state, can create affiliate or click-through nexus.
Some states include exempt sales (such as sales for resale or SaaS) in their nexus calculations. Businesses often overlook these when tracking their exposure.
In states like Colorado, Louisiana, and Missouri, cities and counties can set their own tax rates and filing rules, adding complexity and increasing the risk of overlooked nexus obligations.
Sales tax nexus is no longer a static concept tied solely to physical presence. The post-Wayfair era demands that businesses, especially those selling online or across state lines, actively monitor their activities and adapt to evolving state requirements.
By understanding the types of nexus and implementing robust compliance practices, businesses can minimize risk and ensure they meet their sales tax obligations nationwide. SVA can assist with proactive planning by identifying potential nexus issues in addition to assisting with any compliance obligations.
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