Sales tax nexus: physical presence, Wayfair and economic thresholds
Physical presence, economic nexus after South Dakota v. Wayfair, and why the threshold that matters is each state's current one, worked on a year of Northwind's online orders.
A seller has to collect a state's sales tax when it has nexus there. The oldest kind is physical presence: a shop, a warehouse, staff. Northwind has that in its home state, which is why the walk-in sale on September 8 (JE-5) charged 8% on top of the price. Until 2018 physical presence was the only kind a state could rely on. Then the Supreme Court decided South Dakota v. Wayfair.
A walk-in customer pays $10,260 on the spot: goods at the agreed price, plus 8% sales tax.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 10,260.00 | |
| 4000Revenue | 9,500.00 | |
| 2300Sales tax payable | 760.00 | |
| Balanced | 10,260.00 | 10,260.00 |
The sale is recorded at the price agreed, not at what it cost — and not at what the customer handed over. The tax was charged on the state's behalf and every cent of it is owed onward, so it is credited to sales tax payable, a liability, until the return is filed and paid. Cost is the other half of the sale, and it gets its own entry.
What Wayfair decided
South Dakota passed a law requiring sellers with no presence in the state to collect its sales tax once they delivered enough into it, and sued to test it. The Court upheld the law and overruled the cases that had required physical presence. States with a sales tax followed with economic nexus laws of their own: a threshold of sales into the state, sometimes with a count of transactions, past which a remote seller must register and collect.
Wrong
We have no office in that state, so we don't collect its sales tax.
Right
We have no office in that state, so we check our sales and transactions into it against its threshold.
Since Wayfair, nexus is created by selling into a state, not only by being in it. Not having an office somewhere stopped being an answer in 2018.
Physical presence creates nexus from the first sale. Since Wayfair, enough sales into a state do too, at that state's threshold.
In this lesson: selling through a marketplace, and who collects when you do. Registering, collecting and filing come next, in the sales tax mechanics lesson.
Pages in this lesson
1 page goes deeper, about 4 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Tax — not GAAP
- South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), syllabus (opens in a new tab)The Supreme Court ends the physical presence rule for sales tax collection (decided June 21, 2018)PDF · Free to read
- South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), Part I (opens in a new tab)The South Dakota law the Court upheld — S. B. 106 (2016)PDF · Free to read
- Background reading — not an authority
- Wikipedia, “South Dakota v. Wayfair, Inc.” (opens in a new tab)The case, the 5–4 vote, and what states did nextFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Sales tax nexusThe connection with a state that obliges a seller to collect its sales tax — physical presence, or economic nexus from sales into the state above a threshold (commonly $100,000) since South Dakota v. Wayfair (2018)
- Physical presence nexusThe connection with a state created by being in it — an office, a shop, inventory, employees — which obliges a seller to collect its sales tax from the first sale. Before South Dakota v. Wayfair (2018) it was the only basis on which a state could require collection
- Economic nexusA connection with a state created by economic activity alone — sales into the state above a threshold — rather than physical presence. The basis of remote-seller sales tax since South Dakota v. Wayfair (2018), and of many states' income and franchise taxes, where P.L. 86-272 still shields solicitation of tangible goods sales
- Remote-seller grace periodThe time a seller with no physical presence has, after crossing a state's economic nexus threshold, before it must register and collect — immediately, the first day of a following month, or the next calendar year, depending on the stateConvention
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Journal entry for sales tax collectedWhen a taxable sale is made, debit Cash or Accounts receivable for the total charged, credit Revenue for the price and credit Sales tax payable for the tax. When the return is filed, debit Sales tax payable and credit Cash.
- Sales tax nexus for startups: when you owe tax in a stateSince Wayfair, selling into a state can create a sales tax obligation. How economic nexus works, why SaaS is taxable in some states and when to register.
- States without sales tax: the five, and what it meansAlaska, Delaware, Montana, New Hampshire and Oregon have no statewide sales tax. What that means for sellers, local taxes and gross receipts taxes.
- Voluntary disclosure agreementA deal with a state for a business that owes a tax it never filed and comes forward before the state contacts it. In return the state limits how many years back it collects and waives most penalties. Most states offer one, and sales tax is the usual case.
- SalesTaxSummaryTaxable, exempt and collected by jurisdiction; the liability tied to the GL.