Avoiding the sales tax economic nexus train wreck

Find out which states are most aggressive in asserting Wayfair principles to claim more revenue.
By David J. Brennan Jr., J.D., LL.M. (Tax), and Joseph C. Moffa, CPA, J.D.

Avoiding the sales tax economic nexus train wreck
(Image by ilbusca/iStock)

Just over two years ago in the landmark case South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), the U.S. Supreme Court reversed over 50 years of precedent to get to the result many states wanted — the ability to require out-of-state companies to collect sales tax in another state (called economic nexus). Most jurisdictions have jumped on the economic nexus train to increase their revenues. This article discusses how jurisdictions are implementing economic nexus policies, how states are being particularly aggressive toward businesses in the wake of Wayfair, and how businesses should implement appropriate procedures to limit their exposure when the train stops at their door.


Since Wayfair, jurisdictions have been instituting economic nexus thresholds. These thresholds vary. For instance, California has a sales threshold of $500,000 in the previous or current calendar year, effective April 1, 2019 (Cal. Rev. & Tax. Code §6203(c)(4)(A)). Wisconsin has a threshold of $100,000 or 200 transactions in the previous or current calendar year, effective Oct. 1, 2018 (Wis. Stat. §77.51(13gm)). The states take differing views of what sales should be counted toward the threshold (i.e., all sales, all sales minus all exempt sales, all sales minus sales for resale, etc.).

Even if all sales into a state are exempt, some states take the position the burden is on the business to prove the sales are exempt. If the business cannot prove an exemption, then the default position of many states is that the sales are taxable and the business has nexus, assuming the law removes exempt sales from the threshold. To make things even more complicated, there could be different criteria for meeting the same exemption in various states.

To identify businesses that might have a sales tax collection and reporting obligation, some states are sending letters to business owners asking them to fill out a nexus questionnaire. In some cases, the business is presumed to have nexus until it proves otherwise via the questionnaire and any supporting documentation the state demands.

These questionnaires generally attempt to extract as much information from businesses as possible, with the states' goal being to determine what taxes can be assessed and how far back the liability goes, and to make an assessment based on this determination. When a nexus questionnaire is haphazardly filled out, this is only the beginning of numerous problems. Even when there is credible evidence to the contrary, a state will inevitably go back to the answers provided in the nexus questionnaire when those answers support an assessment. That is why a careful, well-thought-out response is critical to mitigating exposure.

In some instances, audit staff for the state simply wish to make an assessment and force the company to fight the assessment in appeals if the business disagrees. Even in cases of full cooperation, some states have taken a position to impose the maximum penalties and are willing to maintain penalties through litigation. Businesses often do not expect such punitive measures to be taken against them when they cooperate with a state's taxing authorities.

Many business owners are faced with a difficult decision — pay to fight an assessment, pay an assessment they do not owe, or go out of business. However, it is critical to remember that even after going out of business, personal liability potentially endures. States will sometimes pursue the owners, officers, directors, and/or responsible persons in their individual capacity for unpaid taxes. The unfortunate bottom line is the states may not be concerned whether a business goes under. Another consideration is future business registrations. If the state determines who the owners, officers, directors, and/or responsible persons are, it may not allow another business registration to go through if one of those individuals is listed on the application.


Numerous states are pursuing businesses of all sizes if they use Amazon's Fulfillment by Amazon (FBA) service or other similar fulfillment services. The FBA service allows a seller to provide inventory to Amazon, which then takes the inventory and moves it to whichever warehouses it deems appropriate without the business knowing beforehand where the inventory is going. When a sale by the business is made on Amazon, Amazon removes the inventory in the warehouse and ships it to the customer.

States are potentially obtaining from Amazon lists of businesses that have inventory in an Amazon warehouse located within the state. This is one way in which the states are targeting businesses. Sometimes, states will find out about inventory being stored in the state before the business does, as Amazon can change where inventory is stored daily. Therefore, it is often not a question of if, but only a matter of when, the business will be contacted by the state with a nexus inquiry letter.

The position of the states on FBA services is simple — if a business has inventory in the state, the business has nexus via a physical presence in the state and is required to collect sales taxes. The states behave as if clients can dictate to Amazon where it stores inventory; however, nothing is further from the truth. Under Amazon's FBA standard agreement, inventory is moved wholly subject to Amazon's discretion.

The states' aggressive stance on this issue seems to disregard federal constitutional principles, which usually require businesses to have some minimal contact with a state before the state can assert its taxing power. In fact, it has been our firm's experience that after pointing to recent federal court cases discussing this type of issue and the unconstitutional nature of the states' actions, the states say those cases do not apply and the tax assessment stands. To say the least, many states have been emboldened by Wayfair, but not as much as one state (Florida) that has argued Wayfair applies retroactively or another state (Kansas; see the discussion below) that asserts no minimum sales threshold must be met to require collection of sales taxes. Keep in mind that applying Wayfair retroactively may raise separate constitutional issues.


When the states were urging the Supreme Court to rule in favor of South Dakota in Wayfair, one argument they made to persuade the Court to overrule Quill v. North Dakota, 504 U.S. 298 (1992), was that there would be sufficient protections to limit retroactive application of Wayfair. In other words, the states argued it was not their intent to retroactively apply Wayfair. In total, 41 states, including Florida, took this position.

However, once the Court ruled in favor of South Dakota in June 2018, Florida summarily changed its position. This involved a tax case our firm was arguing — Global Hookah Distributors, Inc. v. Department of Business and Professional Regulation, No. 2017-CA-1623 (Fla. Cir. Ct. 1/31/20) (order on parties' cross-motion for summary judgment). Florida unequivocally stated there was no reason Wayfair should not be applied retroactively to the case (Defendant's response to plaintiff's motion for final summary judgment (8/9/18)). The Florida state circuit court granted the state's motion for summary judgment and, as of this writing, Global Hookah will soon appeal the case.

If Florida can change its position, how long will it be before other states begin doing the same thing? The largest concern in this type of situation involves how far back a state may make a tax assessment. Normally, a state may go back only three or four years on average, due to the state's statute of limitation. However, the statute of limitation normally applies in instances where a sales tax return has been filed in the state. If no sales tax return has been filed, most states allow for the possibility of a sales tax assessment going back to the very beginning of when the company first allegedly had nexus with the state.

Another offshoot in the Wayfair saga involves Kansas. Like many other states, Kansas has adopted economic nexus with an effective date of Oct. 1, 2019. What distinguishes Kansas from every other state is its economic nexus threshold. The Kansas Department of Revenue's position is that a single sale of any amount constitutes economic nexus and the seller is therefore required to register, collect, and remit sales tax (Kan. Dep't of Rev., Notice 19-04 (Aug. 1, 2019)).

Kansas Attorney General Derek Schmidt disagrees with this position. Specifically, Schmidt stated in an opinion that the Kansas Department of Revenue lacks authority to adopt such a policy, especially on the grounds that a single sale of any amount creates economic nexus (see Kan. Atty. Gen. Opinion No. 2019-8 (Sept. 30, 2019)). Schmidt's opinion also cited a lack of state legislative authority for the Department of Revenue's position.

In response to the attorney general's opinion, Kansas Gov. Laura Kelly and Mark A. Burghart, the secretary of the Department of Revenue, said they believe they have the authority to unilaterally implement economic nexus in Kansas without any legislative action and to enforce a threshold of a single sale of any amount (Kan. Dep't of Rev., "Secretary Burghart's Statement on Attorney General Derek Schmidt's Opinion of the Collection of Taxes From Out-of-State Retailers" (Sept. 30, 2019)). Kansas is a state that clients must keep a careful eye on based on its aggressive posture.


In light of how states are reacting to Wayfair, what can a company do? Companies need to understand their risk among the states with potential exposure. To do so, a company must know the amount of sales into states as well as the number of transactions into the state for a given time frame. Just because all sales into a state are exempt does not mean the company does not have a filing requirement and potential exposure, as there may be failure-to-file penalties imposed despite the return showing no tax liability. Remember, how to qualify for certain exemptions can vary from state to state. Companies should understand what information must be kept for when they are audited. If the requirements for the exemption are not met, companies may be left responsible for the disallowed exempt sales.

Next is decision time. Once the company has an understanding of where potential exposure lies, it must decide whether it can register prospectively, register through the voluntary disclosure process and pay the back taxes but limit the lookback, or do nothing, potentially threatening the overall survival of the business as exposure continues to rise into the future. Not every company will feel the same way about the options.

A company may not have a choice on what to do if the business is being purchased or if the owner plans on selling in the future. The reason is that more and more buyers are integrating a sales tax analysis into their due diligence for acquisitions — whether asset or stock. Buyers understand the acquisition of the assets of a business or of the business itself may carry sales tax exposure. A savvy buyer will do everything in its power to ensure it mitigates the likelihood of acquiring sales tax liabilities in multiple states. Handling the exposure now could prove to be significantly cheaper than years later, and it could make the company's business more attractive to prospective purchasers.


With states taking an expansive view of economic nexus in the wake of Wayfair, ensuring clients have a clear understanding of the risks to their business and livelihood is a must for the prudent practitioner. Armed with the knowledge that many states consider everyone liable until proven otherwise, companies can take immediate action to mitigate their exposure in the 10,000-plus taxing jurisdictions across the United States. Time is of the essence. The longer a company fails to act, the more potential liabilities will grow. Worse yet, practitioners who do not raise the issue early on may be blamed in the end.

About the authors

David J. Brennan Jr., J.D., LL.M. (Tax), is an attorney at Moffa, Sutton, and Donnini PA, a Fort Lauderdale, Fla.-based tax law firm, which has a primary focus on sales-and-use-tax controversies. He was a senior attorney at the Florida Department of Revenue from 2014 to 2016 and has degrees in accounting and finance. Joseph C. Moffa, CPA, J.D., is the founder and managing shareholder of Moffa, Sutton, and Donnini PA.

To comment on this article or to suggest an idea for another article, contact Sally P. Schreiber, a JofA senior editor, at Sally.Schreiber@aicpa-cima.com.

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