The state of economic nexus

By Donna Scaffidi, CPA, Milwaukee; Chuck Lukens, CPA, Philadelphia; and Jennifer Whatley, Philadelphia

Editor: Mark Heroux, J.D.

On June 30, 2021, Missouri's governor signed a bill (S.B. 153 and 97) establishing sales tax economic nexus provisions in the state. This officially makes Missouri the final jurisdiction, out of all those that levy a sales tax, to set aside the physical presence requirement to determine if a remote seller must register and collect tax on sales made to an in-state customer. Missouri's law is not effective until Jan. 1, 2023, giving such sellers a couple more years before they will need to register and collect sales tax in the state. Additionally, Florida's newly enacted sales tax economic nexus thresholds officially took effect on July 1, 2021. Looking back merely a few years, the sales tax landscape for remote sellers was far different. As e-commerce and online shopping continue to gain a significant share of total retail sales, sellers must tread with increasing caution as state and local tax pitfalls await, now more than ever.

Back when the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), on June 21, 2018, tax practitioners recognized that the case would be one of the most important in state tax history. In its decision, the Court overruled 50-plus years of precedents, resulting in the expansion of nexus-creating activities beyond a physical-presence standard. The Court examined South Dakota's economic tests for establishing sales tax nexus ($100,000 in sales or 200 separate transactions annually) and found them to be reasonable. The law was determined to be constitutionally sound because it provided a safe harbor for businesses with limited in-state activities; it was not retroactive; and it allowed for participation in the Streamlined Sales and Use Tax Agreement, a system that standardizes taxes to reduce administrative and compliance costs.

Within six months of the Wayfair decision, more than half the states that levy sales tax had enacted some form of economic nexus standard or had legislation pending. Most of them followed the thresholds endorsed by the Supreme Court. However, over the past three years, states have begun to diverge from those original thresholds. Many states dropped the transaction thresholds and now rely solely on sales revenue to determine nexus for remote sellers. Additionally, some state rules measure the revenue thresholds based on "gross sales" made into the state, while others only measure "retail sales" or sales of "tangible personal property," making it tricky for a remote seller to determine whether its sales count against the tests.

Compounding the confusion, remote sellers may often need to consider more than the state-level economic nexus provisions. In some states, local jurisdictions may impose their own nexus requirements on a remote seller. In Colorado, many of the largest and most populous cities are "home rule" jurisdictions, meaning the state does not administer local taxes for them. Remote sellers must separately register with and file returns for each of these jurisdictions if nexus is established, and most of these jurisdictions consider local nexus to be created when the state-level economic nexus threshold is exceeded. Additionally, Louisiana's parishes — local governments analogous to counties — levy local sales taxes that must be remitted directly to the parish. To further complicate matters, the parishes have their own sales tax laws, which may differ from the state laws, resulting in sales potentially being taxable at the parish level but not at the state level. Colorado and Louisiana both recently introduced online systems that will allow remote sellers to file one consolidated return to remit state and local taxes for the localities that have elected to participate, but many local jurisdictions do not yet participate in these systems.

Outside the scope of sales tax, many states use a patchwork of economic nexus thresholds similar to those used for sales tax to determine nexus for taxes based on nonincome measures, such as franchise taxes or gross receipts taxes. For example, Ohio imposes a commercial activity tax (CAT) on out-of-state businesses with a bright-line presence in Ohio and Ohio taxable gross receipts of $150,000 or more per calendar year. Washington state's business and occupation (B&O) tax is imposed on any business without physical presence in the state that has more than $100,000 in combined gross receipts attributed to Washington.

Frustratingly, a remote seller may find that registering in such a state for sales tax may have unintended consequences. Some states will automatically register a new sales taxpayer for gross receipts or franchise taxes, assuming that if the remote seller has nexus for sales tax, it also has nexus for other taxes. This is often the case in Washington state. Texas regulations explicitly state that if a foreign taxable corporation has a Texas use tax permit, then it is presumed to have nexus in the state for franchise tax purposes (34 Tex. Admin. Code §3.586(e)).

Accordingly, a remote seller that registers for sales tax in a number of states may create a more substantial compliance burden than originally anticipated. Further, since states with a minimum income or franchise tax require the minimum amount to be paid regardless of state-apportioned sales, a remote seller may be forced to pay even if apportioned sales in the state are minuscule, or be faced with the penalties of noncompliance.

More aggressively, some states have adopted economic nexus thresholds for state income-based taxes. Hawaii applies an income tax nexus threshold that matches the one used for sales tax: $100,000 of sales or 200 separate transactions. Pennsylvania enacted a "rebuttable presumption" that $500,000 in annual sales creates income tax nexus. Furthermore, numerous states have "doing business" statutes that are vague and consider deriving receipts from within the state to create nexus for income tax purposes. Nonetheless, remote sellers should consider whether federal Public Law 86-272, the Interstate Income Act of 1959, applies. Among other provisions, this law prohibits a state from imposing income tax on a seller if its business activity is limited to the solicitation of orders for sales of tangible personal property.

Ultimately, Wayfair is a monumental case solely for sales tax purposes. However, its reverberating effects have resulted in a complex web of state tax rules that create dangerous pitfalls for the unwary. Remote sellers that establish economic nexus for sales tax in a state may find themselves surprised by the compliance challenges presented by local sales tax in addition to income, franchise, or gross receipts taxes in the state. Online buyers should not be shocked when sales tax gets tacked onto their online orders, unless they live in Missouri (for now).


Mark Heroux, J.D., is a tax principal in the Tax Advocacy and Controversy Services practice at Baker Tilly US, LLP in Chicago.

For additional information about these items, contact Mr. Heroux at 312-729-8005 or

Unless otherwise noted, contributors are members of or associated with Baker Tilly US, LLP.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.