States Jump on Economic Nexus Bandwagon, But Questions Remain.

• Author: Oaks, Melissa A.

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...