The Economic Nexus Revolution: Navigating the Wayfair Era for Remote Sellers and Marketplace Facilitators
The advancement of our modern world, and the emergence of the digital age, brought about increased occurrences of untaxed online sales and with it a pressing need to re-evaluate US state sales tax nexus laws.
The landmark US Supreme Court ruling in South Dakota v. Wayfair, Inc., in 2018 was a pivotal moment for previously unreachable online sales (i.e. those conducted online by out-of-state sellers and marketplace facilitators), as it brought about the advent of the “Wayfair Era,” a time of transition and adaptation to new sales tax obligations across US states. Here's what you need to know.
Background: What was the Wayfair case?
Prior to the Wayfair ruling, sales tax nexus laws amongst the states dictated that states could only enforce sales tax collection from businesses with a physical presence within their boarders (i.e. storefronts, warehouses, offices etc.).
These laws originated from two earlier Supreme Court decisions: National Bellas Hess v. Department of Revenue (1967) and Quill Corp. v. North Dakota (1992).
For decades, the foundational tenets of state sales tax nexus laws, as established by Bellas Hess and reinforced by Quill, held that a business must have a physical presence within a state's borders (like storefronts, warehouses, or offices) to be obligated to collect sales tax.
These judgments were deeply rooted in the Commerce Clause of the US Constitution, ensuring that trade between states wasn't unjustly burdened. While these rules served their purpose in the pre-digital age, they couldn't foresee the complexities that the rise of e-commerce would bring to the landscape of state sales taxes.
With its ground-breaking Wayfair decision, the high court recognized the outdated nature of the "physical presence" standard and introduced the concept of "economic nexus" or "virtual presence," as a remedy (which simply allowed South Dakota in this case to require Wayfair to collect and remit sales tax on sales made to in-state customers).
By doing this the court paved the way for other states to similarly mandate that online sellers and marketplace facilitators can be subject to the same tax obligations as traditional brick-and-mortar stores.
Economic nexus: What does it mean?
Following the Wayfair decision, many states adopted economic nexus laws similar to South Dakota's.
These laws mandate online retailers with significant economic activity in the state (e.g., at least USD 100,000 in sales or 200 transactions in the previous or current calendar year) to collect and remit sales tax for purchases by in-state customers.
The term "economic nexus" refers to the idea that if a business meets or exceeds certain sales or transaction criteria set by a state, it has a tax obligation there, regardless of any physical presence.
State-specific economic nexus and marketplace facilitator requirements
Although South Dakota's economic nexus standard set the bar at USD 100,000 in sales or 200 transactions in the previous or current calendar year, the specifics of these thresholds can vary considerably across states.
Here's a closer look at few states' sales tax and economic nexus legislation - as applicable to remote retailers and marketplace facilitators - which would trigger a sales tax collection obligation in each jurisdiction:
California
- Economic nexus threshold for remote retailers: >USD 500,000 in sales in current or previous calendar year; no transaction count requirement.
- The sales threshold totals the combined sales of tangible personal property of the retailer and all affiliate entities.
- Marketplace facilitator law: >USD 500,000 in sales made or facilitated in current or previous calendar year; no transaction count requirement.
- The sales threshold totals the combined sales of tangible personal property of the marketplace facilitator, third-party retailers and all affiliate entities.
Texas
- Economic nexus threshold for remote retailers: collection and remittance required unless safe harbor provision (of <USD 500,000 in gross sales in the previous calendar months) applies.
- The safe harbor threshold totals the combined sales of taxable tangible personal property and services into Texas (including separately stated transport, installation and similar fees, as well as exempt sales and sales for resale).
- Marketplace facilitator law: collection required on all sales made or facilitated through the marketplace sales unless safe harbor provision (of <USD 500,000 in gross sales in the previous calendar months) applies.
New York
- Economic nexus threshold for remote retailers: >USD 500,000 in cumulative sales and >100 transactions in the state across the immediately preceding four calendar quarters.
- Marketplace facilitator law: >USD 500,000 in cumulative sales and >100 transactions made or facilitated in the state across the immediately preceding four calendar quarters.
New Mexico
- Economic nexus threshold for remote retailers: >USD 100,000 in total taxable gross receipts - made in preceding calendar year - from sales, leases and licenses of tangible personal property, sales of licenses and certain sales of services and licenses for use of real property sourced to New Mexico; no transaction threshold.
- Marketplace facilitator law: >USD 100,000 in total taxable gross receipts - made or facilitated in the preceding calendar year - from sales, leases and licenses of tangible personal property, sales of licenses and certain sales of services and licenses for use of real property sourced to New Mexico; no transaction threshold.
Florida
- Economic nexus threshold for remote retailers: >USD 100,000 in sales in previous calendar year; no transaction threshold.
- Marketplace facilitator law: >USD 100,000 in total taxable sales made or facilitated in previous calendar year; no transaction threshold.
Remote retailers and marketplace facilitators: The new tax collectors
Along with economic nexus laws, many states have also enacted marketplace facilitator laws. These require online marketplaces to collect sales tax and remit said taxes to the state on behalf of their third-party sellers conducting business on their platforms.
Who are marketplace facilitators?
Major online marketplaces, like Wayfair, Amazon, or eBay, fall into the category of "marketplace facilitators". Simply put, they act as intermediaries between buyers and third-party sellers.
The responsibility shift
Traditionally, individual sellers bore the responsibility of collecting and remitting sales tax. However, the new economic nexus rules transition this duty from individual sellers to big online marketplaces.
Criteria for tax collection
Not all sales on these platforms are be subjected to the economic nexus rules. It's crucial for sellers to understand that the obligation to collect sales tax by the platform is triggered only when the platform meets the specific state's sales tax nexus rules. These rules vary and can depend on factors like the volume of sales or the amount of revenue generated within the state.
Direct sellers remain unaffected
What about sellers who've established their own online stores or use other direct channels to reach their customers? The Wayfair sales tax nexus standards do not affect their obligation to collect tax on retail sales in the same way. These sellers need to continue to collect sales tax in old-fashioned way: by collecting sales tax from their customers and remitting it to the respective states themselves.
Navigating compliance in the Wayfair Era
Given the variance in economic nexus thresholds from state to state, staying compliant in the Wayfair Era can be a challenge for remote sellers and marketplace facilitators.
Automated solutions and software platforms tracking reporting requirements have emerged to help businesses stay on top of their sales tax compliance and ensure timely and accurate tax collection and remittance.
You can also check out our helpful sales tax nexus chart tracking economic nexus and sales transaction thresholds across the 50 US states and the District of Columbia. This chart also conveniently tracks applicable economic nexus law qualification periods, related sales tax rates and direct sources for your further research. Contact our Sales team to find out more.
Looking ahead: The future of the Wayfair Era
As the digital economy evolves, so too will and the need for remote sellers and marketplace facilitators to stay informed of economic nexus and sales transactions thresholds, as well as the broader landscape of sales tax laws.
Because, as the above makes clear, keeping track of nuances amongst the states various tax collection and remittance obligations is no easy feat, investing in the right tools and resources - to ensure compliance - will prove a vital task.