Two States Using Wayfair Economic Nexus Standard More Broadly

Annette Nellen

As we know, the June 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., et al, allows for an economic nexus threshold for all types of taxes. Many states already had an economic nexus threshold for income taxes. Many states have adopted the South Dakota threshold for nexus. This standard generally starts use tax obligations when a vendor has over $100,000 of sales in the prior calendar year or the current year to date or 200 or more transactions.

Now, one state – Hawaii, has adopted that same threshold for its state income tax effective for tax years beginning after 12/31/19.  [SB 495 (Act 221, 7/2/19)] Hawaii’s sales tax nexus threshold based on the South Dakota law upheld by the Court started 7/1/18.

Also, the Texas Comptroller has proposed the same via a proposed regulatory change for its franchise tax. The Texas sales tax Wayfair threshold though is over $500,000 of sales and it doesn’t matter how many transactions there are (there is only a dollar sales threshold).

Remember that a state cannot override P.L. 86-272 which still applies to limit nexus if a taxpayer has no physical presence other than sales personnel who solicit orders that are approved and shipped from out-of-state. This is relevant for Hawaii’s state income tax, but doesn’t apply to the Texas franchise tax because it is not a net income tax.

Making the thresholds the same should be a lot simpler for small businesses. I don’t agree with the South Dakota threshold’s 200 or more transactions because for many small businesses though because that can be a small dollar amount, such as if selling items that cost less than $10 each. I think that is not sufficient nexus for commerce clause purposes.  I think states should do like California and Texas did and drop the transaction threshold and only use a dollar of sales gross receipts that is at least $100,000 and perhaps higher in large states (after all, buyers not charged sales tax still have to pay use tax on their own, and the higher threshold keeps the burden on the state tax agency more manageable and more likely that most remote vendors will be found and have to collect.

Not all states define sales the same for these purposes so there is still complexity for multi-state sellers. But for a remote seller to know that once they have use tax collection obligations in a state they also have income tax obligations (assuming they are not protected by PL 86-272), should provide greater certainty to businesses and state tax agencies and simplify recordkeeping.

What do you think?

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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1 comment on “Two States Using Wayfair Economic Nexus Standard More Broadly”

  • Wholesalers are getting the worst of it. They have to comply, filing zero returns and managing exemption certificates. Wayfair will destroy small wholesaler family owned businesses.

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