Before 2018, a seller generally had to collect a state's sales tax only if it had a physical presence there. South Dakota v. Wayfair, decided in 2018, removed that requirement. Since then, states have written economic nexus rules that reach sellers with significant sales into the state even when the seller has no office, warehouse or employee there. For a CPA firm with e-commerce, software or wholesale clients, a periodic nexus review is core compliance work. This article explains the holding and gives a process. Each state publishes its own thresholds and measurement rules, and every figure in a review should come from the state's department of revenue.
What the Court decided
In a 5-4 opinion written by Justice Kennedy, the Court overruled Quill Corp. v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois. It called the physical presence rule unsound and incorrect and held that South Dakota's substantial nexus requirement was met based on the economic and virtual contacts the sellers had with the state. The Court left other Commerce Clause challenges for the lower courts.
The Court described the features of the South Dakota statute it reviewed. The law applied to sellers that, on an annual basis, delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for delivery into the state. The Court noted that the statute applied a safe harbor for sellers with limited business in South Dakota, that it did not apply retroactively and that South Dakota had adopted the Streamlined Sales and Use Tax Agreement, which standardizes rules and gives sellers access to state-paid software. Those figures describe the statute the Court reviewed. They are not a national rule, and states have since set their own thresholds and their own measurement rules.
What economic nexus looks like in practice
States generally measure a remote seller's sales into the state against a threshold and require registration and collection once the threshold is crossed. The details vary:
- Measurement basis. Gross sales, taxable sales or retail sales, with different exclusions.
- Transaction counts. Some states count transactions as well as dollars. Others use dollars only.
- Measurement period. The calendar year, the preceding year, or a rolling twelve months.
- Effective date of obligation. The first day of the month after crossing, or later.
- Marketplace sales. Sales through a marketplace facilitator are treated differently from direct sales in many states.
Confirm each of these points against the state's published guidance for each state in scope.
A six-step nexus review
- Map the sales. Obtain sales by state for each period, from the accounting system or the e-commerce platform, by delivery destination and not by billing address.
- Separate taxable from exempt. Taxable products, exempt sales to resellers and sales of services each need their own columns, since states differ on what counts toward a threshold.
- Identify marketplace sales. Separate direct sales from marketplace facilitator sales.
- Compare to each state's rules. Record the threshold, the measurement basis and the state source for each state.
- Document physical presence. Employees, inventory in third-party warehouses, remote workers, trade show activity and equipment can each create nexus separately from sales volume.
- Decide and act. Register and collect, apply for voluntary disclosure where past exposure exists, or document why no obligation exists.
Look-back exposure
If a seller crossed a threshold in the past and did not collect, the exposure is the tax that should have been collected, plus penalties and interest, for the open periods. Voluntary disclosure programs in many states limit the look-back period in exchange for registration. Quantify the exposure for each state, then compare it to the cost of disclosure before recommending action.
For clients under audit or review, unrecorded sales tax exposure is a loss contingency. Estimate and disclose according to ASC 450. The glossary entries on sales tax nexus and income tax nexus separate the two concepts, since sales tax nexus does not decide income tax nexus.
Systems and process
Once registered, the client needs product taxability mapping, rate determination by destination, exemption certificate collection, filing frequency control and a reconciliation of tax collected to tax remitted. A monthly control that ties sales tax payable in the general ledger to filed returns catches errors early. Include sales tax in the year-end audit-ready checklist described in the month-end close process.
Engagement letter points
State what the firm does and does not cover. A nexus study covers the periods and states listed. Rate monitoring and return preparation are separate services. A client that adds a new state or a new sales channel should trigger a repeat review.
FAQ
Does the Wayfair decision set a $100,000 threshold for every state?
No. Those figures describe the South Dakota statute the Court reviewed. Each state sets its own rules.
Does physical presence still matter?
Yes. Physical presence still creates nexus. Wayfair means a seller can have nexus without it.
Is sales tax nexus the same as income tax nexus?
No. Each has its own standards.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), Legal Information Institute: https://www.law.cornell.edu/supremecourt/text/17-494
- Supreme Court of the United States, South Dakota v. Wayfair, Inc. opinion: https://www.supremecourt.gov/opinions/17pdf/585us1r58_pok0.pdf
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