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Editorial 10 MIN READ

Economic nexus after Wayfair: the state-by-state scramble

Nineteen days after the opinion, most states already had a statute on the books and the rest were drafting one

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 9 sections
  1. What the Court actually held
  2. States that already had an economic-nexus statute on the books
  3. States that leaned on "notice and reporting" instead
  4. States that have no action to take
  5. States that have not yet acted
  6. The thresholds you are actually going to see
  7. What a remote seller has to do this quarter
  8. What is still unresolved
  9. Sources

outh Dakota v. Wayfair, Inc., 138 S. Ct. 2080, was decided on June 21, 2018, and economic nexus is now the default rule for sales-tax collection in the United States. Nineteen days later, the question is no longer whether a remote seller can be made to collect; it is which states have the paperwork ready and which do not.

The short answer, on July 10, is that roughly two dozen states had already passed some form of economic-nexus statute while waiting for the Court to overrule Quill Corp. v. North Dakota, 504 U.S. 298 (1992). A handful leaned on older "notice and reporting" regimes that become obsolete in a matter of weeks. Four states have no general sales tax and sit this one out entirely. The rest are drafting.

What the Court actually held

Justice Kennedy, writing for a 5-4 majority, concluded that the physical- presence test articulated in National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and reaffirmed in Quill, was "unsound and incorrect." The Court upheld South Dakota Senate Bill 106 (2016), codified at S.D. Codified Laws § 10-64-2, which imposes a sales- tax collection obligation on any remote seller that either delivers more than $100,000 of goods or services into the state or completes 200 or more separate transactions with South Dakota purchasers in the prior or current calendar year.

The opinion does two things at once. It removes physical presence as a constitutional floor under the Commerce Clause, and it blesses the specific South Dakota thresholds as a safe harbor, with three features highlighted: a de minimis floor, a prospective-only application, and South Dakota's membership in the Streamlined Sales and Use Tax Agreement (SSUTA). The Court did not decide whether narrower state laws, or laws without those protections, are constitutional. That question is being litigated in real time.

For the longer treatment of the reasoning itself, see South Dakota v. Wayfair: the decision. This piece is about the inventory problem that hit compliance desks the following Monday.

States that already had an economic-nexus statute on the books

The pattern since 2016 was to enact a Wayfair-style law, then wait. Many of these statutes contained an express trigger tied to Quill being overruled or were simply held in enforcement limbo. South Dakota's own state court injunction against enforcement of SB 106 is, at this writing, on remand for lifting.

Counting the laws already signed, the following states were sitting on some version of an economic-nexus standard when the opinion came down: Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Michigan (announced, effective October 1), Mississippi, North Dakota, Rhode Island, South Dakota, Tennessee, Utah (2018 session), Vermont, Washington, and Wyoming. Several more, including Arkansas and New Jersey, have economic-nexus bills either in conference or awaiting signature.

The drafting is not uniform. Most mirror South Dakota's thresholds almost verbatim. Alabama's Rule 810-6-2-.90.03, effective since January 1, 2016 and enforceable after Wayfair, uses $250,000 in Alabama sales with no transaction-count alternative. Georgia's HB 61, enacted in May 2018, sets the threshold at $250,000 or 200 transactions and makes collection optional where the seller instead files use-tax notices to purchasers and to the Department of Revenue. Connecticut, under Public Act 18-49, adopts $250,000 and 200 transactions as a conjunctive test (both required), which is materially narrower than the South Dakota disjunctive test. Pennsylvania's Act 43 of 2017 operates as a notice-and-report regime up to a $10,000 threshold, with collection optional above it; the state has announced it is evaluating whether to convert to a Wayfair-style rule.

Massachusetts is the one to watch for doctrinal reasons. 830 CMR 64H.1.7, effective October 1, 2017, predates Wayfair and asserts jurisdiction under a "cookie nexus" theory: an out-of-state vendor with more than $500,000 in Massachusetts sales and at least 100 transactions is deemed to have in-state physical presence by virtue of software, cookies, and content-delivery-network servers touching Massachusetts computers. After Wayfair the physical-presence fiction becomes unnecessary, but the regulation is still being challenged in Crutchfield Corp. v. Harding (Mass. Super. Ct., pending) and the state has not yet said whether it will rewrite.

States that leaned on "notice and reporting" instead

Before Wayfair, several states copied Colorado's 2010 approach: if a remote seller will not collect, it must send annual purchase summaries to customers and to the state, under penalty. The Tenth Circuit upheld Colorado's version in Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016), after a well-known detour at the Supreme Court on standing grounds. Colorado's statute sits at C.R.S. § 39-21-112(3.5) and reaches sellers with more than $100,000 in Colorado sales.

The notice-and-report states going into Wayfair were Colorado, Louisiana, Oklahoma, Pennsylvania, Rhode Island, South Dakota (before SB 106), Vermont, and Washington. Several, including Washington and Louisiana, overlaid an economic-nexus rule in 2017 or 2018; the rest are now deciding whether to keep the informational regime, convert to direct collection, or run both in parallel. Oklahoma's HB 1019 (2018), signed April 10, gives remote sellers a choice: collect, or file notices. After Wayfair the choice architecture looks stingy, and revisions are expected in the 2019 session.

States that have no action to take

Five states impose no general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Alaska has a patchwork of municipal sales taxes, and local Alaska jurisdictions can and likely will move toward some form of remote-seller collection, probably through an intermunicipal compact; there is nothing to enforce statewide today. The other four are out of this fight entirely on the collection side, though their businesses still have to deal with every other state's thresholds when they ship.

States that have not yet acted

Florida, Missouri, Kansas, and New Mexico have no economic-nexus statute as of this writing. Florida's 2018 session ended in March without a bill. Missouri's S.B. 881 died in committee. Kansas has announced administrative guidance is coming but has no regulation on file. New Mexico taxes at the source of the service (gross receipts, not a destination sales tax), and the state's Taxation and Revenue Department has said publicly it is still analyzing whether Wayfair reaches its gross-receipts regime.

California is the largest unknown. No statute is on the books, but the Department of Tax and Fee Administration has indicated it will move by administrative rule or legislation this year. The draft figures reported in Sacramento press range from $100,000 and 200 transactions on the low end to a $500,000 floor with no transaction count. The choice is politically significant: California accounts for roughly one in eight national e-commerce dollars, and a narrow threshold would trigger immediate compliance obligations on thousands of smaller vendors, which has lobbying implications on both sides.

New York has a statutory hook that predates Wayfair. Tax Law § 1101(b)(8)(iv), the "Amazon law" upheld in Overstock.com, Inc. v. New York State Dep't of Taxation and Finance, 20 N.Y.3d 586 (2013), imposes collection on vendors with in-state referrers above $10,000. That is an affiliate-nexus rule rather than an economic-nexus rule, and the Department of Taxation and Finance announced July 5 that it is "reviewing options" under Wayfair. A new threshold is likely before the end of the year.

The thresholds you are actually going to see

Most states are copying, or will copy, South Dakota's $100,000 or 200 transactions, disjunctive, prior or current calendar year. The deviations cluster in a handful of shapes.

The first is the raised dollar floor with no transaction count. Alabama at $250,000, Mississippi at $250,000, Tennessee at $500,000 under Rule 1320-05-01-.129 (pending enforcement), and probably California at some number north of $100,000. The rationale is administrative: small sellers do not justify the collection overhead. The legal question is whether a raised threshold actually resolves the Commerce Clause concerns or merely narrows the class of sellers inconvenienced.

The second is the conjunctive test: both the dollar and the transaction prong must be met. Connecticut is currently the cleanest example. The practical effect is to exempt high-volume, low-dollar merchants (subscription boxes, mobile app stores passing through third-party sales) as long as one prong stays below.

The third is the inclusion of services, digital goods, or marketplace sales in the base. Washington's statute, RCW 82.08.052 (as amended), picks up digital products. Iowa's SF 2417 extends collection to marketplace facilitators above $100,000 or 200 transactions, which is a separate obligation layered on the individual seller rule. About a third of the Wayfair-era statutes contain a marketplace-facilitator provision; that fraction is climbing fast.

The fourth is the effective date. Most states with existing statutes have selected October 1, 2018, or January 1, 2019, to begin enforcement, giving remote sellers a runway the Wayfair opinion praised South Dakota for providing. A few, including Hawaii (July 1, 2018, under Act 41) and Vermont (July 1, 2018, under Act 134 of 2016), are already on or past their effective dates. Prospective-only application is not constitutionally required outside the Wayfair safe harbor, but it is going to be the near-universal choice because retroactivity invites litigation.

What a remote seller has to do this quarter

The operational answer is that any business shipping into more than a few states should be running a threshold check against prior-year and current- year totals state by state, with the South Dakota numbers as the worst- case rule and each state's actual numbers pulled on top. The effective dates matter: a seller that crosses Alabama's $250,000 threshold today does not owe collection retroactively to July 1; the registration obligation kicks in on the state's announced start date, usually with a 30-to-90-day notice window.

Registration itself is a state-by-state process. The Streamlined Sales Tax system covers 23 member states and will register a remote seller for all of them at once through the Central Registration System. The non-streamlined states (California, Florida, Illinois, New York, Texas, and others) require individual registration. For a seller who crosses 20 thresholds simultaneously, the administrative burden is nontrivial, and it is the burden, not the tax itself, that will drive the compliance software market and the next round of constitutional challenges.

The collection obligation begins on the effective date, applies to the tax rate at the destination (not the origin), and is enforced through the same audit and penalty machinery the state already uses for in-state vendors. The economics are ugly for low-margin sellers who had been implicitly competing on tax-free pricing; for sellers who already collected in most states because of Amazon-style affiliate arrangements, the incremental cost is manageable.

What is still unresolved

Wayfair resolved physical presence as a Commerce Clause floor and blessed the South Dakota thresholds, and not much beyond that. The opinion explicitly reserved questions about: whether a different threshold would fail; whether retroactive enforcement survives; whether a non-streamlined state's regime, lacking uniform rate and base rules, imposes an undue burden; and whether states may reach transactions involving in-state purchasers through marketplace facilitators whose own contacts with the state are incidental.

All four questions are queued for litigation. The Multistate Tax Commission is drafting model language to narrow the risk surface. The Streamlined Sales Tax Governing Board is accepting new member applications with some urgency, on the theory that SSUTA membership is the closest thing to a safe-harbor signature the Court has given. And Congress, which has been unable to pass either the Marketplace Fairness Act or the Remote Transactions Parity Act for the better part of a decade, has new reason to legislate: a single federal threshold would preempt the state-by-state patchwork, and the trade associations that had been lobbying against any federal bill are quietly repositioning.

If you were waiting to see which way this would go, it has gone. The planning question for the next two quarters is not whether to prepare for economic nexus; it is how many state registrations your books can absorb by January.

Sources

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