Dec 09, 2020

Economic Nexus Thresholds Set After Wayfair May Be Dropping

Jennifer W. Karpchuk, JDBy Jennifer W. Karpchuk, JD

The South Dakota v. Wayfair decision by the U.S. Supreme Court occurred over two years ago, yet its impact continues to grow, particularly in light of COVID-19 and an increased reliance on e-commerce due to quarantines and work-from-home environments. This blog discusses some of the impacts Wayfair may continue to have as states seek to address budgets devastated by the health crisis.

Economic Nexus

U.S. Supreme Court BuildingIn Wayfair, the U.S. Supreme Court struck down the requirement that a taxpayer have a physical presence in a taxing state to be subject to its sales tax collection requirements. Mere economic presence was sufficient under the facts of the case. Post-Wayfair, states moved rapidly to implement economic nexus laws – the majority of which mirrored those imposed in South Dakota ($100,000 or 200 transactions in a state annually). Several states, including Pennsylvania, adopted a variation of the South Dakota economic nexus provision – eliminating the transaction threshold and relying solely on a $100,000 monetary threshold. Although the decision was handed down in 2018, many states’ Wayfair laws are still quite new.

COVID-19 and the accompanying quarantine and work-from-home requirements accelerated an already booming e-commerce sector of the economy. A physical presence standard would have prohibited many states from capturing that revenue. Many states have been able to capitalize on the increases in e-commerce, thereby softening some of the fiscal impact of COVID-19.

There are still two states that do not impose economic nexus: Florida and Missouri. Of the states that do impose economic nexus, all but one (Kansas) have adopted marketplace facilitator laws. The financial impact of COVID-19 may be the final push those hold-out states need to hop on the bandwagon.


COVID-19 has already begun to affect the Wayfair sales thresholds. While a number of states adopted the South Dakota model, a few imposed higher thresholds. Tennessee, for one, imposed a $500,000 economic nexus threshold. However, on June 30, 2020, Tennessee’s S.B. 2932 lowered the state’s economic nexus threshold to $100,000, effective Oct. 1, 2020. Other states with higher thresholds – such as Alabama, California, New York, Mississippi, and Texas – may also consider lowering their thresholds to make up for revenue shortfalls.

In an attempt to fill budget gaps, some states may seek to become even more aggressive and drop below the South Dakota model. Others may consider adopting Kansas’s constitutionally suspect position of no threshold whatsoever.1 While both options may appear to be attractive prospects for cash-strapped states, lowered thresholds would be misguided for a number of reasons. First, they would be met with legal challenges. Second, many states’ marketplace facilitator laws already capture a number of smaller remote sellers that on their own do not meet the $100,000 threshold. Third, the additional revenue would likely be minimal, while the administrative and compliance costs could be high.

Income and Gross Receipts Taxes

In an additional effort to fill budget gaps, Wayfair laws may start to bleed into the realm of income and gross receipts taxes. Prior to Wayfair, there was debate over whether the physical-presence standard applied equally to sales taxes as to income and gross receipts taxes.  With the physical presence test abolished, that argument has been quashed.

A few states and localities have adopted economic nexus provisions for purposes of their income or gross receipts taxes – including Philadelphia for purposes of its business income and receipts tax. The adoption of economic nexus provisions for states’ income and gross receipts taxes may become an attractive option for some states. For income tax purposes, Public Law 86-272 would offer some protections, but such safeguards would likely not extend to services or gross receipts taxes.

Expansion of Taxation on Services

One obvious way for states to derive more revenue is to expand the ability of their Wayfair laws to reach more taxpayers. Some states may start imposing their sales tax on more services. Although tangible personal property is typically subject to sales tax unless specifically exempt, the reverse is true of services. States tend to exclude most services from sales tax unless specifically enumerated.

A current trend has been to target digital services for taxation.  However, such laws carry their own specific legal challenges, particularly under the Permanent Internet Tax Freedom Act (PITFA). Assuming a state can avoid running afoul of the PITFA and other legal pitfalls, increasing the types of services subject to tax while applying economic nexus principles to a new group of taxpayers could result in a new and growing revenue stream and may become an attractive option to some states.

Wayfair Audits

Audits and assessments of out-of-state taxpayers that have failed to comply with a states’ Wayfair laws may become an advantageous pursuit. Many states already maintain a list of taxpayers they think should be collecting within their state. Some states, including Pennsylvania, sent letters to certain taxpayers they believed had an obligation under the new laws. In an attempt to raise revenue, states may begin to use their resources to target companies that they believe have obligations under their remote seller or marketplace facilitator laws but have failed to comply.

With the fiscal impact wrought by COVID-19, taxpayers can expect responses on the state and local tax front over the coming months and years. Wayfair’s legacy will likely continue to endure and affect state revenue and policy decision for the foreseeable future.

1 The Kansas Department of Revenue took the position that a single sale of any denomination was sufficient to create economic nexus – thereby requiring registration, collection, and remittance of sales tax. [[Kan. Dep’t of Rev., Notice 19-04 (Aug. 1, 2019)]] The Kansas Attorney General openly disagreed with the department’s interpretation and stated that the department lacked the authority to adopt its economic nexus policy. [[Kan. Atty. Gen. Opinion No. 2019-8 (Sept. 30, 2019)]] Not to be dissuaded, the Secretary of the Department of Revenue responded that the department believed it did have the authority. [[Kan. Dep’t of Rev., “Secretary Burghart’s Statement on Attorney General Derek Schmidt’s Opinion of the Collection of Taxes from Out-of-State Retailers” (Sept. 30, 2019)]]

Jennifer W. Karpchuk, JD, is the co-chair of the state and local tax controversy and planning practice at Chamberlain Hrdlicka. She can be reached at jkarpchuk@chamberlainlaw.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.