Wayfair nexus laws emerged following the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, which overturned the previous physical presence requirement for sales tax collection. These laws enable states to require online sellers to collect and remit sales tax when their sales or transaction volume in a state reach a specific threshold — even if the seller has no storefront, warehouse, or employees there.
Background and Purpose
Before 2018, the landmark 1992 Supreme Court decision in Quill Corp. v. North Dakota mandated that businesses needed a physical presence, such as a store or office, in a state to owe sales tax. This rule allowed many online retailers to avoid collecting sales tax in states where they only sold remotely. As e-commerce rapidly grew, states struggled to collect sales taxes owed on significant online sales.
The South Dakota v. Wayfair decision changed that precedent. It allowed states to impose “economic nexus” standards, meaning online sellers must collect sales tax if they surpass sales or transaction thresholds set by each state. This ruling empowered states to close gaps in tax collection caused by purely remote sales.
How Wayfair Nexus Laws Work
Each state sets its own economic nexus thresholds for sales volume and/or transaction count within its borders. For example, South Dakota requires sellers to collect tax if they exceed $100,000 in sales or 200 transactions annually. Other states have different thresholds; for instance, Texas and California generally set the threshold at $500,000 in sales, with or without transaction limits.
Once a seller meets or exceeds a state’s nexus criteria, they must:
- Register to collect sales tax in that state.
- Charge the appropriate sales tax rate on purchases to customers in that state.
- File periodic sales tax returns and remit collected taxes on time.
These obligations apply regardless of whether the seller operates solely online without a physical location in the state.
Who Needs to Comply?
- Online sellers shipping tangible goods nationwide.
- Marketplace sellers (though some marketplaces may handle collection, sellers should verify responsibilities).
- Dropshippers with customers in multiple states.
- Small to large e-commerce businesses expanding across state lines.
Some states exempt small sellers under certain thresholds or specific product categories, but these rules vary widely.
Practical Examples
Consider a small business owner selling handmade crafts online. If sales to customers in Texas exceed $500,000 annually, the business must register for Texas sales tax, collect, and remit it—even if they ship products from home in another state.
A dropshipping operation with customers in many states might surpass several states’ thresholds, requiring tax compliance in multiple jurisdictions.
Failing to comply with Wayfair nexus laws can result in penalties, interest, and liability for back taxes owed.
Tips for Online Sellers
- Track sales by state carefully through accounting tools or marketplace reports.
- Understand each state’s nexus threshold and tax rates. The Streamlined Sales Tax Governing Board offers helpful resources.
- Register and file sales tax returns promptly to avoid penalties.
- Use sales tax automation software like Avalara or TaxJar, or consult a tax professional for guidance.
Common Misconceptions
- “I have no physical store there, so I don’t owe tax.” This is outdated; economic nexus is about sales volume, not physical presence.
- “Marketplaces always collect the sales tax for me.” Some marketplaces handle this under marketplace facilitator laws, but not all, so sellers must confirm.
- “I only sell digital goods.” Sales tax rules for digital products vary by state, so check each state’s regulations.
Frequently Asked Questions
Q: What triggers Wayfair nexus?
A: Generally, meeting or exceeding specific sales revenue or transaction count thresholds set by each state.
Q: Do all states have Wayfair nexus laws?
A: Most states have adopted economic nexus laws with varying thresholds and requirements.
Q: How often do I need to file sales tax returns?
A: Filing frequency depends on the state and sales volume, commonly monthly or quarterly.
Q: Can I deduct sales tax paid on purchases from sales tax owed?
A: Sales tax on purchases and sales are treated separately; consult a tax expert for your specific situation.
State Wayfair Nexus Thresholds (Summary)
| State | Sales Threshold | Transaction Threshold |
|---|---|---|
| South Dakota | $100,000 | 200 transactions |
| Texas | $500,000 | No transaction limit |
| California | $500,000 | No transaction limit |
| New York | $500,000 | 100 transactions |
| Florida | $100,000 | No transaction limit |
Thresholds can change; always verify with current state tax authority websites.
For more on sales tax fundamentals, see our glossary entry on Sales Tax. For further detailed IRS guidance, visit the IRS page on Sales and Use Tax.
Understanding and complying with Wayfair nexus laws is essential for online sellers to avoid penalties and ensure smooth business operations across states. Tracking sales, registering where required, and timely tax collection help maintain compliance in today’s digital economy.