How Wayfair’s Economic Nexus Has Redefined Business Tax Obligations
The U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair, Inc. (138 S. Ct. 2080, 2018) overturned years of precedent that had precluded states from imposing sales taxes on sellers who derived sales from a state but had no physical presence there (e.g., payroll or property). Today, the impact of Wayfair has reached far beyond sales tax, including income tax, net worth/franchise tax, gross receipts tax, and overall business compliance. Although the initial focus was to level the playing field for brick-and-mortar and e-commerce businesses regarding the responsibility to collect sales tax, the Wayfair case has marked a shift to a new and much more elaborate tax environment that every multistate and e-commerce business, along with their tax advisors, needs to understand and address with even greater care.
The Immediate Impact: Sales Tax Collection Revolutionized
The most significant impact of Wayfair has been the increased registration, collection, and remittance of sales tax. Every state that has a sales tax has implemented economic nexus rules under which sellers who do not maintain a physical presence in the state must collect and remit sales tax based on the value and/or volume of business transacted within that state. These thresholds, which states have typically set at $100,000 in sales or 200 transactions, have created new compliance requirements for hundreds of thousands of businesses.
Wayfair created an unprecedented new legal climate for small and mid-size businesses. Previously, these businesses relied on the principle that having no physical presence meant no requirement to register or charge sales tax. Wayfair has fundamentally changed the landscape, however. These companies are now compelled to register, collect, and remit sales tax in multiple jurisdictions. This affects both retailers and wholesalers. Due to economic nexus requirements, several states require wholesalers to register and file sales tax returns, even if they don’t have taxable sales. In addition, wholesalers must collect resale certificates, and states may assess sales tax during audits if these certificates aren’t properly provided. This shift has led to an increase in the cost of compliance and the need to automate compliance through the use of sales tax software.
Beyond Sales Tax: Economic Nexus and Income Tax Thresholds
Although Wayfair was specifically related to sales tax, it has fueled a shift in how states approach other state-imposed taxes, most notably income tax. Numerous states are using the Wayfair decision to justify broadening their income tax nexus standards beyond physical presence, taking an economic nexus approach.
States such as California, Massachusetts, and New York now assert that if a business derives a certain threshold of revenue in the state, the business may now be subject to that state’s income tax. It makes no difference whether the company has an office, employees, or property in the state. States’ application of income tax economic nexus has significantly increased compliance burdens, particularly for service-based and software companies with a national customer base but limited physical presence.
The Franchise Tax and Annual Filing Domino Effect
In addition to income tax, numerous states require companies to either pay a franchise tax or submit an annual report simply for “doing business” or deriving income in the state. For example, Texas and Tennessee impose fees on gross receipts, while California mandates an $800 minimum franchise tax just for operating in the state. Some of these rules have been in place for many years, even before Wayfair, but they are now heightened as states look to expand their reach. States are now leveraging economic nexus to apply these franchise taxes and other annual filings. They are taking the approach that if a business has economic nexus in the state, it is subject to these franchise and net worth taxes.
The Gross Receipts Tax Challenge
Gross receipts taxes present a unique challenge, because they are based on a company’s total revenue without a deduction for discounts or cost of goods sold (COGS). These taxes are often levied irrespective of a company’s earnings and can result in unexpected liabilities. Examples of gross receipts tax jurisdictions include the following:
- ▪ Ohio’s commercial activity tax (CAT) is imposed on businesses that have gross receipts in excess of $6 million in Ohio. Ohio increased its threshold from $3 million in calendar year 2024 to $6 million in 2025.
- ▪ The Oregon Corporate Activity Tax (CAT) is required when annual Oregon-based sales exceed $1 million.
- ▪ Washington’s business and occupation (B&O) tax applies to gross receipts of business activities occurring within the state.
- ▪ Nevada Commerce Tax is paid by companies with annual gross revenue in excess of $4 million.
These taxes often catch companies off guard because they do not depend on profitability; in some instances, companies do not even become aware of these obligations until a due diligence process (discussed below), or if an audit notice is issued by a state taxing authority. Needless to say, CPAs need to be aware of all these taxes in order to properly advise businesses operating in multiple states.
The Due Diligence Wake-Up Call
An overlooked effect of Wayfair is its impact on due diligence in mergers and acquisitions, financing, and tax planning. Given the numerous economic standards now impacting sales, income, franchise, and gross receipts taxes, companies are facing increased scrutiny from potential buyers.
M&A deals are becoming more complex as buyers are requiring detailed review of the seller’s multistate tax footprint. Buyers are looking to make sure that the seller has not overlooked economic nexus implications; not only with respect to sales tax but also income, franchise, and gross receipts taxes.
Due diligence must examine more extensive issues such as:
- ▪ Economic nexus for sales, income, franchise, and gross receipts taxes
- ▪ Missed state and local tax compliance filings
- ▪ Sales tax registration, collection, and remittance
- ▪ Voluntary disclosure opportunities.
The New Normal
Less than 10 years since Wayfair, the concept of economic nexus has changed. What began as a decision overhauling sales tax law has eventually influenced nearly every area of state taxation. Economic nexus is the dominant framework driving companies to rethink which states to register and file in and how to track revenue and assess tax compliance risks across multiple jurisdictions.
For businesses, this means focusing on tax compliance, automation, and due diligence. Companies are no longer able to depend solely on their physical location to determine tax filing responsibilities. Now, everything depends on revenue thresholds, multistate exposure, and proactive management of tax risks in a climate of constantly changing legislation.
As states continually refine and enforce their nexus laws, businesses need to stay agile, knowledgeable, and responsible. Wayfair is not just about taxes; it is about the new rules that apply to businesses with activities in today’s connected, multi-jurisdictional, and digital economy. Indeed, CPAs need to continue to monitor all these significant developments in order to properly advise businesses.
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