Wayfair Decision and Online Sales Tax — Economic Nexus for E-Commerce Sellers

Before 2018, you only had to collect sales tax in states where your business had a physical presence — an office, a warehouse, an employee. Online retailers could sell nationally and only collect sales tax in their handful of states with physical operations. That changed when the Supreme Court issued South Dakota v. Wayfair, Inc. (2018), overruling a 26-year-old precedent (Quill Corp. v. North Dakota, 1992) and holding that states may require out-of-state businesses to collect and remit sales tax based solely on their economic activity in a state — no physical presence required. Within 18 months, nearly all 45 states with sales taxes (and the District of Columbia) enacted "economic nexus" laws requiring remote sellers to collect sales tax once they exceed specified thresholds — typically $100,000 in annual sales or 200 transactions in the state. For the millions of businesses that sell online — from Etsy sellers to large e-commerce operations to software companies — Wayfair fundamentally changed the compliance landscape, adding the potential obligation to collect, file, and remit sales tax in up to 46 jurisdictions simultaneously.

Current Law (2026)

Background — The Wayfair Revolution

Pre-Wayfair: Under Quill Corp. v. North Dakota (1992), a state could only require a business to collect sales tax if that business had a "physical nexus" in the state — employees, offices, warehouses, inventory, or tangible property. Online retailers like Wayfair, Amazon third-party sellers, and software companies with no physical presence in most states were not required to collect sales tax there. Customers technically owed "use tax" (the consumer-side equivalent of sales tax on unpaid sales tax), but use tax was routinely not paid, and states had little practical ability to collect it from millions of individual consumers.

The revenue gap: The states estimated they were losing $8-33 billion annually in uncollected sales tax from remote sellers. The explosion of e-commerce made this increasingly untenable — major e-commerce retailers were gaining a 5-10% price advantage over local brick-and-mortar competitors who were required to collect sales tax.

South Dakota v. Wayfair, Inc. (2018): South Dakota enacted a statute requiring out-of-state sellers to collect sales tax once they exceeded $100,000 in annual sales or 200 transactions in the state. Wayfair sued, arguing the physical presence rule barred the requirement. The Supreme Court (5-4, Justice Kennedy writing) overruled Quill, holding that:

• Quill was incorrectly decided — its physical presence rule had no foundation in the dormant Commerce Clause
• The economic realities of modern commerce made the rule untenable
• South Dakota's law was valid because it contained adequate safeguards: a reasonable threshold, no retroactive enforcement, and participation in the Streamlined Sales Tax Agreement

After Wayfair, every state with a sales tax enacted its own economic nexus law.

How Economic Nexus Works

The threshold: Most states use a threshold of $100,000 in annual sales to customers in the state OR 200 or more separate transactions, whichever is reached first. A few states use only the $100,000 threshold (without the 200-transaction test). Once you cross the threshold in the current or prior year, you must register with the state's revenue agency, collect the applicable sales tax rate from customers, and file periodic returns.

When nexus is triggered: Economic nexus thresholds typically measure either the current calendar year or the prior calendar year. If you exceed the threshold at any point in either period, you are required to begin collecting from that point forward (and may owe back taxes if the state has retroactive enforcement provisions — most don't, per the Wayfair safeguard).

Registration: Each state requires separate registration. Most states have online registration systems accessible through their department of revenue websites. The Streamlined Sales Tax (SST) Registration System allows a single registration for all 24 SST member states simultaneously.

Filing and remittance: After registration, you must file returns and remit collected tax on schedule — typically monthly, quarterly, or annually based on your sales volume in that state. Missing filing deadlines triggers interest and penalties.

Marketplace Facilitator Laws — The Amazon/Etsy Solution

All 45 sales tax states now require "marketplace facilitators" — platforms that process transactions and collect payment on behalf of third-party sellers — to collect and remit sales tax on those sales. This means:

• If you sell on Amazon FBA or Fulfilled by Amazon: Amazon collects and remits sales tax in all applicable states for your sales. You don't need to collect on those sales or file separately.
• If you sell on Etsy: Etsy collects and remits in all applicable states for your Etsy sales.
• If you sell on eBay: eBay collects and remits for sales made through eBay.
• If you sell on Walmart Marketplace, Shopify (as a marketplace), or similar: Same rule applies.

What marketplace facilitator laws mean for sellers: If all your sales are through marketplace facilitators, your sales tax compliance burden may be essentially zero for those sales. However, if you also have a direct-to-consumer website (Shopify store, WooCommerce site) outside the marketplace, those direct sales are not covered by the facilitator's collection obligation — you must collect and remit yourself for direct sales once you hit thresholds.

The 1099-K reporting interaction: Marketplace platforms also report sales to the IRS on Form 1099-K. For 2025+ (delayed from earlier years), the 1099-K threshold dropped to $5,000 in annual payments (eventually dropping to $600). If you're receiving 1099-Ks for marketplace sales, those amounts represent gross revenue that must be reported on your income tax return — separate from but coordinated with sales tax obligations. Sole proprietors selling online also owe self-employment tax on the net profit from those sales.

Product Taxability — The Major Complexity

Sales tax rules are not uniform across states, and product taxability is the largest source of complexity:

Food: Grocery food exempt in most states; prepared food taxable; "candy" sometimes taxed separately from food; Texas taxes some sodas differently; the line between exempt grocery items and taxable prepared food is hotly litigated in every state.

Clothing: New York, Pennsylvania, Minnesota exempt most clothing under $110/item. Most other states tax clothing. Vermont and New Jersey exempt clothing under certain thresholds.

Digital products and SaaS: Software-as-a-service is taxable in about 30 states. Downloaded software varies. Streaming services (Netflix, Spotify) face varying treatment. Digital books, music, and games — all over the map. This is where most modern tech companies face unexpected nexus issues.

Services: Generally not taxable in most states, but this varies dramatically. Texas and Hawaii tax many services. Professional services (legal, accounting, medical) are generally exempt everywhere, but some personal services are taxable.

Shipping and handling: About 30 states tax shipping if the underlying goods are taxable; 15 states exempt shipping; a few require shipping to be separately stated.

How It Affects You

State Variations

Sales tax law is almost entirely state law — there is no federal sales tax. Each state sets its own rates (ranging from 0% in the five no-tax states to 9.55% in California), thresholds, product taxability rules, and exemption structures. Local jurisdictions in most states add additional layers of rates and rules. The Streamlined Sales Tax (SST) Agreement is a voluntary compact among 24 member states (representing about half of U.S. economic activity) that simplifies definitions and filing — SST-registered sellers can use a single registration for all 24 states and often receive audit protection if they use certified software.

Pending Legislation

Congress has repeatedly considered but not enacted federal legislation to:

• Create uniform national economic nexus standards
• Simplify the multi-state filing burden through a federal system
• Create small-seller exemptions at the federal level

The most recent federal bill (the Marketplace Fairness Act and its successors) did not advance. States continue to diverge on threshold amounts, transaction counts, and product taxability rules. Some states (Illinois, Connecticut) have enacted economic nexus laws with different thresholds or rules than the South Dakota model; the risk of divergent state laws increasing over time is real.

Recent Developments

The Wayfair decision (June 2018) triggered a rapid state-by-state adoption of economic nexus laws; by 2020, all 45 sales tax states had laws in place. The IRS 1099-K threshold change (reducing from $20,000/200 transactions to $5,000 in 2024, eventually $600) has created coordination complexity between sales tax reporting (state level) and income tax reporting (federal level). Avalara, TaxJar, and Vertex have built major businesses providing automated sales tax compliance software; compliance costs for mid-size e-commerce sellers have increased substantially since Wayfair but remain manageable with automation. The Supreme Court declined to revisit Wayfair in subsequent cases, cementing economic nexus as the law of the land.

• OBBBA federal online sales tax preemption proposal — not enacted: The OBBBA debate included proposals to establish a federal framework for online sales tax — either preempting state economic nexus laws and replacing them with a uniform federal system, or codifying the Wayfair standard with uniform thresholds. Neither approach made it into the final OBBBA. The federal preemption proposal was opposed by states' rights advocates; the Wayfair codification was opposed by small business groups arguing the $100,000/$200 transactions threshold is too low. The patchwork of 45 different state systems remains the operative framework.
• Marketplace facilitator laws — Amazon/eBay/Etsy collect: All 45 sales tax states now require "marketplace facilitators" — Amazon, eBay, Etsy, Shopify, and similar platforms — to collect and remit sales tax on behalf of third-party sellers. This shift has dramatically reduced the compliance burden on individual sellers using these platforms (the platform handles collection and remittance) while generating significant revenue for states. Amazon, which resisted marketplace facilitator laws for years, now collects sales tax in all 45 states. Third-party sellers on Amazon report their own sales tax obligations in states where they have physical nexus; the marketplace facilitator rules generally cover remote sales made through the platform.
• 1099-K threshold and income vs. sales tax confusion: The IRS's reduction of the 1099-K reporting threshold (from $20,000/200 transactions to $5,000 for 2024 and moving toward $600) creates significant confusion with state sales tax. A seller who receives a 1099-K for $50,000 in platform sales owes federal income tax on profit (not gross sales) and owes state sales tax based on each state's threshold (typically $100,000 or 200 transactions in that state). Many casual online sellers receiving their first 1099-K assume the full amount is taxable income rather than gross sales; tax professionals report a surge in consultations from first-time 1099-K recipients trying to understand their obligations.
• Digital goods and services — the next Wayfair frontier: The Wayfair framework applies to tangible personal property and some digital goods; the taxation of digital services (streaming subscriptions, SaaS software, digital downloads) varies dramatically by state. Some states (Tennessee, Texas, New York) tax digital goods comprehensively; others exempt them. Federal-level analogs such as federal excise taxes operate on a separate track and generally don't reach these digital categories. The SSUTA (Streamlined Sales and Use Tax Agreement) — a multi-state effort to simplify sales tax for remote sellers — has added digital goods definitions, but only 24 states are SSUTA members. The rapid growth of subscription software, streaming content, and digital service marketplaces has created new economic nexus and taxability questions that state courts and legislatures are still resolving.