Economic Nexus and Wayfair’s Impact on Cloud Communications Industry: A Three-Part Series


Allison D. Rule, Partner and Communications Taxes & Fees Practice lead at Marashlian & Donahue, PLLC, The CommLaw Group
Jacqueline R. Neff, Senior Managing Attorney
Seth L. Williams, Associate Attorney

By now, businesses with exposure to state and local sales taxes have almost certainly heard about the Supreme Court’s recent South Dakota v. Wayfair decision.  Much ink has already been spilled over this impactful ruling, so the authors of this three-part series will not expend much time rehashing esoteric legal issues associated with the decision.  Rather, true to our firm’s practice philosophy, this series of articles will focus on the practical implications of the decision on cloud communications service providers, including remote sellers of Unified Communications as a Service (“UCaaS”), Platform as a Service (“PaaS”), and other Software as a Service (“SaaS”)-based communications offerings.

We will evaluate and answer important questions that providers of such “over the Internet”-based solutions should be asking themselves, such as:

  • What risks do providers selling and/or delivering services in multiple states face;
  • Why should affected providers seek experienced legal counsel in the wake of Wayfair, and
  • What are the next steps providers should be taking in order to prepare for and address the anticipated torrent of new sales tax responsibilities?

Part I of our series provides a brief overview of the Wayfair decision, focusing on the impact it has on “cloud communications” vendors.  It also identifies the material risks and consequences for the industry segment in light of the remaining uncertainty left open by the Court’s ruling.

Part II will detail the economic nexus requirements currently on the books in other states and highlight those that are currently subject to ongoing litigation.  Part III will then drill down on the expected reactions to Wayfair from various state and local tax authorities, concluding with a discussion of the proactive steps providers can take to mitigate exposure and ensure compliance with the myriad of diverse economic nexus requirements that are either currently on the books in jurisdictions all across the nation, or will be soon.

The intent of this series is to provide cloud-based communications providers and other similarly-situated online remote sellers/retailers with the following:

  • A better understanding of the impact and scope of existing economic nexus requirements already on the books in a number of states;
  • An overview of economic nexus requirements currently subject to litigation and how to best address compliance in the face of uncertainty;
  • An outline of potential state and local reactions to Wayfair; and
  • A discussion of proactive steps providers can take now to address tax compliance considerations in the aftermath of Wayfair.

So without further adieu, let’s begin…

Wayfair Overview

In short, Wayfair overturns long-standing Supreme Court precedent that required a seller to have a meaningful physical presence in a state in order to create nexus for sales tax purposes.  While the decision paves the way for states to impose sales tax liability based on economic factors, Wayfair is not a general endorsement of all economic nexus standards.  Rather, the Court only explicitly approved South Dakota’s economic nexus formula, and the decision makes clear that the Commerce Clause and due process requirements of the U.S. Constitution still mandate that state taxes are neither discriminatory nor unduly burdensome to interstate commerce.

In finding South Dakota’s law constitutional, the Supreme Court considered how the law would apply to a seller with no physical presence in the state.  The South Dakota law only applies to a seller selling more than $100,000 of goods or services into South Dakota or engaging in 200 or more transactions in the state each year.  Based on this analysis, the Court identified six factors it considered in determining the South Dakota law did not discriminate or unduly burden interstate commerce.  Although it is unclear how much weight the Court gave each factor, the factors include South Dakota’s:

  • Inclusion of a safe harbor for a seller that transacts limited business in South Dakota (the $100,000 or 200 transaction thresholds);
  • Prospective-only application of the law (the law does not apply retroactively); and
  • Adoption of the Streamlined Sales and Use Tax Agreement, which requires:
    • A single, state level tax administration;
    • A simplified tax rate structure, including uniform definitions of products and services; and
    • The state to offer free sales tax software and immunity from audit liability for a seller who uses the state’s software.

Uncertainty Surrounding Economic Nexus Requirements

The potential for other states to adopt economic nexus rules that differ from South Dakota’s rules is a significant source of uncertainty and potential risk for businesses.  Indeed, there are indications that some states view Wayfair as opening the door to nexus rules that are more expansive than those of South Dakota.  And, unbeknownst to many retailers, there are a handful of states, in addition to South Dakota, that have implemented and are enforcing a variety of economic nexus requirements on out-of-state sellers.  Thus, retailers must understand and contend with existing economic nexus requirements, as well as plan for anticipated state reactions to Wayfair in the form of new and varied economic nexus requirements.

Further, the impact of Wayfair could extend beyond state sales taxes.  Many states impose additional taxes on communications services, the application of which on out-of-state providers will likely be governed by Wayfair and similar economic tax considerations.  And, in many states, localities have their own taxing regimes and authority.  Thus, providers must consider potential economic nexus requirements at both the state and local levels, over hundreds of taxing jurisdictions.

The variability among the states’ approaches to economic nexus considerations can include the following:

  • Wide variation as to economic thresholds, with some state thresholds being as high as $500,000 in annual sales or as low as $10,000 in annual sales;
  • Thresholds being determined by the number of annual transactions vs. the amount of annual revenue;
  • The application of economic considerations to local taxes;
  • The application of economic considerations to all transaction taxes; and
  • Whether economic nexus requirements will be applied retroactivity, the availability of amnesty, and/or the availability of voluntary disclosure programs.

In short, there is significant variability regarding how each taxing authority has implemented or will implement economic nexus requirements.  Further, there is additional uncertainty surrounding the compliance with and enforcement of both existing and newly created standards during the inevitable legal battles that will come as states experiment with different economic nexus rules in the wake of Wayfair.

As will be addressed in Part II of this series, a number of economic nexus laws also remain subject to litigation, including South Dakota’s law, which the Supreme Court remanded to the South Dakota Supreme Court for further consideration.  While this litigation continues, businesses must make determinations about how and whether to collect and remit transaction taxes in a number of jurisdictions.  Moreover, changes may occur to a seller’s obligations in a given state depending on the outcome of legal proceedings that may not get significant press coverage outside the sales tax or trade press.  This underscores the importance of retaining expert legal and accounting professionals to help monitor the changing economic nexus landscape and to ensure timely compliance with new economic nexus requirements.

Finally, after contending with a range of state decisions regarding economic nexus thresholds, a seller will also need to determine its sales tax liability in each state in which it has economic nexus.  Taxability questions can be as or more difficult than determining whether a seller has nexus in the first place.  And, like the variation in economic nexus thresholds, the taxability of certain goods and services varies widely from state to state and from locality to locality.  Particularly with respect to telecommunications and cloud-based services, where minor differences in implementation or offerings can dramatically change the taxability of a product or service, it is critical for a provider to consult legal counsel to help the provider understand the tax implications of the seller’s offering and to develop a strategy to minimize exposure to applicable taxes.

Stay tuned for Part II of this series – to be released on July 25, 2018.

In the meantime, if you have any questions about Wayfair or the applicability of economic nexus laws to your business, please contact, Allison Rule,, Jackie Neff,, or Seth Williams,  You may learn more about our firm, Marashlian & Donahue, PLLC, The CommLaw Group by visiting our website:

ATTORNEY ADVERTISING DISCLAIMER: This information may be considered advertising in some jurisdictions under the applicable law and ethical rules. The determination of the need for legal services and the choice of a lawyer are extremely important decisions and should not be based solely upon advertisements or self-proclaimed expertise. No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers

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