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Key takeaways
- Economic nexus replaced physical presence: The Wayfair ruling expanded states’ power to collect sales tax from remote sellers, requiring businesses to track thresholds and register in more states.
- Compliance is increasingly complex and costly: With over 10,000 U.S. tax jurisdictions, small and mid-sized businesses face higher costs, administrative burdens, and greater audit risks.
- Automation and expert support are essential: Using tax automation tools and consulting experienced advisors helps businesses stay compliant and reduce exposure as states continue tightening enforcement.
In short: New economic nexus laws mean US states can make out-of-state sellers collect sales tax based on sales, not physical presence. The 2018 South Dakota v. Wayfair Supreme Court ruling allowed this. Interstate and ecommerce sellers now face more filings across 10,000+ tax jurisdictions, higher compliance costs and more audit risk.
Many ecommerce business owners, interstate sellers and Amazon resellers are frustrated by the 2018 court ruling that changed sales tax compliance. Why? The ruling helps states fill their coffers, but it puts a heavy burden on already busy small business owners. This post explains what changed and why business owners are upset. It also covers how these laws affect your business and what you can do to stay compliant.
Before we dive too deep, let's talk about nexus.
Nexus is the minimum link your business must have with a state before that state can collect sales tax on your sales. If your business meets the nexus criteria in a state, you are legally required to collect and pay sales tax there. Related reading: 2022 Sales Tax Nexus and Economic Nexus: Everything You Need to Know.
How did nexus and eCommerce evolve?
Nexus rules moved from physical presence in 1992 to economic nexus in 2018, as ecommerce grew. Where did it all begin? How did it change? And why did it take so long to address? Here's the play-by-play.
- 1992: SCOTUS Rules on 'Physical Presence' Nexus
In the landmark case Quill vs. North Dakota, the court named ‘physical presence’ as the key test for sales tax nexus. - 1994-1996: The Dot Com Boom Takes Hold and eComm is Born
Netscape launches. It helps new online marketplaces, Amazon and eBay, remove geographic barriers for shoppers. - 2002: Brick and Mortar Retail Giants Go Digital
Walmart and Costco launch online shopping platforms to stay competitive. - 2003-2004: eComm Solutions Pop Up Left and Right
Payment processors and ecommerce platforms like PayPal, Instacart and Magento launch to support ecommerce growth. - 2005-2009: The Competition Heats Up
Tech site Newegg, digital content store Steam and discount dealer Groupon bring new categories and more competition to ecommerce. - 2010-2013: Social Media Makes Money on User Data
Facebook, Pinterest and Instagram race to find the best way to use active user data. Their goal is to sell products and services through highly targeted marketing tools. - 2014: eComm Revenue Reaches New Highs Year-over-Year
Revenue from interstate ecommerce keeps climbing, and early talk turns into real debate. States across the US start seriously looking at how to get their cut. - 2016: South Dakota Introduces 'Economic Nexus'
South Dakota passes a state law requiring online retailers with more than $100,000 in annual sales to pay a 4.5% tax rate. - 2018: SCOTUS Re-evaluates Nexus Criteria
South Dakota filed an appeal with the Supreme Court (South Dakota vs. Wayfair), and won. SCOTUS agreed it was time to redefine when and how states tax online and interstate sales.
What changed after the Wayfair ruling?
After the Wayfair ruling, states could tax remote sellers based on economic nexus, not just physical presence. In 2018, the Supreme Court overturned the physical presence rule from the 1992 Quill case. The court said that rule was unfit and unsound for today's economy. We cover this in more detail in What the Supreme Court’s Ruling on Sales Tax Means to Small Businesses.
The Supreme Court also found that South Dakota's idea of 'economic nexus' fits modern commerce better. This big change opened the floodgates. States rushed to revise their nexus laws and raise their sales tax revenue.
However, economic nexus does not replace physical nexus. It works in addition to physical nexus. In fact, businesses with healthy revenues will probably meet the criteria for both types of nexus.
Since then, states from California to New York have brought in new nexus laws to get their cut of unclaimed sales tax. Naturally, online retailers and Amazon resellers are asking, “what, exactly, does this mean for me and my business?”
5 Ways New Nexus Laws Affect Your Business Now
1. What is the impact of ‘economic nexus’?
Economic nexus means a state can tax your sales there even if you have no physical presence. In South Dakota vs. Wayfair, the Supreme Court found the physical presence test unsound for today's economy. Why? Physical presence in a state is often little more than a PO box used as a billing address. That's not enough to set nexus when most sales are to buyers in other states.
The Supreme Court ruled that economic nexus is a better policy for modern interstate and online commerce. Today, every state with a statewide sales tax has an economic nexus law.
Economic nexus thresholds vary from state to state. Here's a snapshot of how states define economic nexus thresholds today.
Common Attributes:
- Revenue-based economic nexus threshold: Gross revenue from sales is greater than or equal to $X. This can be as high as $500,000.
- Transaction-based economic nexus threshold: The business makes X transactions or more per year. This typically ranges from 100 to 200.
Every state economic nexus policy uses one or both of these common attributes. If a business meets or exceeds a state's dollar amount or transaction count, it has economic nexus there. To make things more complicated, some states also have less common rules, listed below.
Less Common Attributes:
- Remote seller that has a referral/reseller agreement with an in-state retailer
- Use of in-state servers, services, or payment processing
- Affiliate, marketplace, click-through, or “cookie” nexus
Timelines also vary from state to state. Some tax jurisdictions use last year's sales data to decide nexus, while others use current year data. Of those using current year data, a handful have gone back and forth on retroactive tax. This is tax on sales made before the threshold was met. Luckily, most have opted not to charge it for now.
As you can see, the rules for economic nexus thresholds vary widely and change quickly. This leads us to our next point...
2. How do new nexus laws complicate compliance?
New nexus laws mean businesses must now register, collect and remit tax in far more places. This is one of the biggest pain points for online and interstate retailers.
Here's why it's hard to manage:
- There are 10,000+ tax jurisdictions in the US
- You must work out which states you have nexus in, based on each state's economic threshold
- When a state changes its economic nexus laws, businesses that meet the threshold must remit tax there
- You must stay up to date on nexus policies, rates and changes for all states you do business in
- Each state has its own filing schedule and deadlines, which you must track to avoid late or non-filing fees
Overwhelmed? You're not alone. And states keep updating their own ecommerce sales tax rules, which adds to the challenge.
In his dissent in South Dakota v. Wayfair (2018), Chief Justice John Roberts wrote: “The Court, for example, breezily disregards the costs that its decision will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. Over 10,000 jurisdictions levy sales taxes, each with ‘different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence’ in the jurisdiction.”
3. Why is complex sales tax compliance so expensive?
“Wait, I have Nexus in Texas?”
Complex sales tax compliance is expensive because it often means paying for outside help. You have more states to remit in, more tax rates to track, more policies to watch and more deadlines to meet. So many small and medium business owners turn to accountants and sales tax experts. Sadly, all those people and services cost money and add to overhead.
For many small ecommerce companies, the cost may be too much. Paying sales tax on more sales and paying for compliance help could put them out of business. For those who make it work, consumers will likely bear most of the cost through higher prices.
This leaves the door wide open for high-volume retailers to dominate online retail. They have established accounting teams, more resources and bigger profit margins.
States don't want to discourage interstate commerce, so they are treading lightly. South Dakota tried to ease the burden on small businesses. It set an economic nexus threshold that leaves out companies that do very little business in the state. South Dakota also doesn't require businesses to remit sales tax retroactively. For a closer look, see State and Local Tax (SALT): What's New and What's Next.
South Dakota is also one of the twenty-some states that use the Streamlined Sales and Use Tax Agreement.
This agreement aims to standardize taxes and cut admin and compliance costs. It simplifies tax tables, offers uniform tax definitions, and so on. This helps to a degree, but it doesn't solve every problem businesses now face to stay compliant.
4. Why does more nexus mean more audit risk?
More nexus means more audit risk because every extra state is another chance to make a mistake. The more places you must file in, the more likely you are to miss a deadline, make a simple error or get flagged for a random audit.
Audit risk factors include:
- Improper sales tax setup in your POS
- Not changing rates when laws change
- Forgetting to run regular software updates
- Poor inventory and sales tracking
- Inconsistent, messy or inaccurate records
To simplify compliance, use proven accounting software that makes tax compliance easy. Also hire a business accountant to manage your books. Someone who understands nexus and how it affects your business is invaluable as states rush to take their share of sales tax. Smart point of sale software also makes sales tax compliance easier to manage.
5. Do new laws affect all interstate sellers?
Yes, new nexus laws affect all interstate sellers, not just online stores. Don't assume you're safe just because you have a brick and mortar location. Economic nexus doesn't discriminate. Whatever type of business you own, if you meet a state's economic threshold, you owe tax there. Most press coverage has focused on online retailers, so this is easy to miss. It's vital that you understand where your business fits in.
How can you handle economic nexus compliance?
You can handle economic nexus compliance by using the right people and tools. However you look at it, new nexus rules have many downsides for small and mid-size interstate retailers. The top five are complex, fast-changing laws, confusing deadlines, inconsistent policies, extra overhead and higher audit risk.
It will take time to understand your new sales tax duties, but you shouldn't go it alone. Get ready to tackle economic nexus laws head-on by using your resources wisely. Research your options and make every effort to have the right people and the right tools in place to help you with compliance.
How Taxually handles this
Taxually’s LumaTax runs a nexus analysis on your sales, helps you register in the states where you must collect, and prepares and files multi-state sales tax returns, including Canadian GST/HST. LumaTax is currently available to enterprises and accounting firms. For the full workflow, read how to automate US sales tax filing in every state.
Related guides
Frequently asked questions
What changed with the South Dakota v. Wayfair decision?
The 2018 Supreme Court ruling overturned the old “physical presence” rule for sales tax. States can now require out-of-state sellers to collect and remit sales tax based on economic nexus—that is, reaching certain sales or transaction thresholds within the state.
What does “economic nexus” mean for my business?
If your total sales or transaction volume in a state exceeds that state’s threshold (often $100,000 or 200 transactions), you’re required to register, collect, and remit sales tax there—even if you don’t have a physical location.
Why are small businesses concerned about the ruling?
The decision created a huge compliance burden for smaller sellers. With over 10,000 U.S. tax jurisdictions—each with its own rules, rates, and filing schedules—staying compliant can be time-consuming, complex, and expensive.
How can businesses stay compliant under new nexus laws?
Track your sales in every state, monitor when thresholds are met, and register promptly. Using automated tax software and working with a CPA experienced in multi-state compliance can help reduce risk and administrative strain.
