Economic Nexus and Wayfair’s Impact on Cloud Communications Industry: Part III of III


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

In Parts I and II of this series, we explored the Wayfair decision and the variations among economic nexus laws already in place in a number of states.  Part III will examine some of the biggest questions resulting from Wayfair as more states consider economic nexus issues and more companies face remote seller sales tax liability.

These forward-looking issues present a particular kind of risk for businesses.  While the lack of uniformity in existing economic nexus laws can complicate a business’s approach to nationwide tax compliance, companies can at least develop strategies to deal with existing laws with the help of legal and accounting tax experts.  However, uncertainty stemming from Wayfair in the form of potential state and federal legislation and enforcement by state Departments of Revenue present the kinds of unknowns that are the most difficult for businesses to address.

The exact nature of these risks may be impossible to identify and quantify, but we believe there are several areas that businesses should consider.  First, retroactivity could further complicate the already complex process of calculating sales tax exposure for remote sellers and add tax liability to past transactions a business reasonably believed were not subject to sales tax based on a physical nexus in a state.  Second, evolving state laws will introduce unknown risks as states potentially test new types of economic nexus requirements.  These new state laws (and subsequent tax guidance by state Departments of Revenue) may not always be bad for businesses.  For example, clearer economic nexus laws may call into question the basis of more questionable physical nexus standards often used by states to exert jurisdiction over cloud communications providers.  Finally, Congress may enact legislation to simplify and unify remote seller requirements across the country in the wake of the Wayfair decision, but the form of that potential legislation is currently unknown.

Retroactive Remote Sales Tax Enforcement

Retroactive tax liability occurs when a taxing authority imposes backward looking tax liability.  For example, a taxpayer may face retroactive liability if it failed to timely file tax returns, which often allows tax authorities to look at tax liability beyond the relevant statute of limitations.  A taxpayer can also face retroactive tax liability as a result of adverse audit findings.  Retroactive tax liability is particularly concerning in the sales tax context because businesses typically collect sales taxes from customers and pass that money along to the taxing authority.  However, when unpaid past due sales taxes are owed, businesses must pay those taxes out-of-pocket and cannot collect those taxes from their customer, the true taxpayer for sales tax purposes.

Potential retroactive enforcement is a major concern for remote sellers with new economic sales tax nexus exposure.  In Wayfair, the Supreme Court cited, with approval, South Dakota’s prospective-only application of its economic nexus law, but the Court did not predicate the constitutionality of other laws on prospective-only application.  Like South Dakota, a number of other states have laws that take effect only after the decision in Wayfair, and Hawaii, one of the few states openly considering retroactive economic nexus, has now confirmed that it will not retroactively administer its economic nexus rules.

That said, as more states adopt economic nexus requirements, it is possible that more aggressive states (or cash-strapped states) could attempt to impose sales tax liability on remote sellers retroactively.  Such a decision would almost certainly face a legal challenge, but some states effectively dare taxpayers to sue them over unfavorable tax decisions on the theory that taxpayers may not have the appetite or resources for a lengthy legal battle that would cost more than the underlying tax assessment.  Moreover, a state could circumscribe the retroactive period, for example to the date of the Wayfair decision, and/or provide a voluntary disclosure or amnesty program tied to retroactive enforcement of its economic nexus requirements.  This would further reduce the benefits of challenging the state’s retroactive application of economic nexus while still allowing a state to recapture some of the sales tax revenue lost by not being among the first to act after the Supreme Court’s decision.

Depending on a business’s exposure to various state sales tax regimes and the company’s current financial position, it may make sense for businesses to set aside a reserve to deal with potential economic nexus issues, including retroactive sales tax liability, over the next few years.  However, before taking such action, a business first should consult with tax professionals.

Evolving State Economic Nexus Requirements
            More States Expected to Enact Economic Nexus Laws    

Businesses should expect more states to adopt economic nexus laws going forward.  California, Florida, New York, and Texas currently do not have economic nexus laws on the books, but the Texas Comptroller of Public Accounts has already announced plans to review Texas tax rules in light of Wayfair and has targeted early 2019 as the effective date for any Texas rule changes based on Wayfair.

Idaho, Maryland, and South Carolina have also announced plans to review Wayfair and existing state laws to determine if remote sellers owe sales tax in those states based on Wayfair.  Maryland’s guidance is especially concerning because it suggests that state law permits the state to collect sales taxes as broadly as constitutionally permissible and that remote sellers should, for now at least, reach their own decisions about whether to begin remitting sales taxes on goods or services sold in Maryland.

In addition to these states, we expect most states with a sales tax to eventually consider whether to impose economic nexus requirements on remote sellers.  For example, Colorado currently has only notice and reporting requirements for remote sellers; however, those requirements were largely the product of litigation and a settlement involving Amazon.  With Wayfair, Colorado may again consider adopting a more aggressive approach to economic nexus.  Massachusetts is also likely to consider implementing economic nexus rules if the state’s attempt to realize online cookie-based nexus is any guide.

On the other hand, states without a state sales tax may take action to limit the impact of Wayfair on businesses located in those states.  So far, New Hampshire has been the most aggressive non-sales tax state in this regard.  The New Hampshire House proposed a bill that would have created a number of protections for New Hampshire businesses required to pay remote economic nexus-based sales taxes in other states.  One of the bill’s requirements would have forced the Department of Revenue in a state asserting economic nexus over a New Hampshire business to register with and pay a fee to the New Hampshire Department of Justice.  Ultimately, the bill failed in favor of the creation of a commission to study how to protect New Hampshire businesses from paying remote sales tax, but New Hampshire seems to be moving aggressively to prevent companies in that state from being forced to collect and pay out-of-state sales taxes.  How successful New Hampshire will be remains to be seen.

            Potential Benefits of Clearer Economic Nexus Rules at State Level

Many businesses are understandably frustrated that economic nexus laws may expand the number of jurisdictions in which they are required to collect and remit sales taxes.  However, if there is a silver lining to expanded economic nexus for companies, it may be that economic nexus standards start to replace other more nebulous nexus standards states have used in the past.  This is particularly true for online and cloud-based businesses and services where nexus has often been a challenge to pin down.  However, we would caution that states may not view the opportunity to establish economic nexus as a reason to give up other nexus rationales for fear of losing out on sales tax revenue they already collect based on those other rationales. 

For example, many VoIP providers may have subjected themselves to tax jurisdiction in states based on the tenuous physical nexus standard established by the City of Baltimore v. Vonage decision.  While the decision was rendered by a United Stated District Court in Maryland, numerous state Departments of Revenue have relied on that decision to support their assertion of nexus over VoIP and cloud-based communications providers. 

The Wayfair case now creates a situation that adds clarity to this tenuous position by establishing a baseline of economic nexus in those states where economic nexus laws are in place.  Further, Wayfair also arguably creates a benchmark for the establishment of nexus in additional states where a provider’s sole link to a state is a customer billing address in the state. 

Thus, in the wake of Wayfair, VoIP and cloud-based communications providers that have relied solely on the Vonage decision in shaping their tax compliance strategies may wish to reevaluate their approach.  In particular, providers should proactively evaluate their revenue and transaction levels in states that have or are expended to implement economic threshold requirements to ensure that they are in compliance with the existing economic nexus requirements and that they are not unnecessarily subjecting themselves to nexus in states where their revenue and transaction levels fall short of the thresholds.  Further, providers could also look to the boundaries established in Wayfair in any state where the provider’s sole link to the jurisdiction is the existence of a customer billing address.

Potential Congressional Action

In addition to the multi-directional action at the state level, Congress may well chime in on remote seller sales tax obligations in the wake of Wayfair.  On July 24, 2018, the House Judiciary Committee held a hearing on the Wayfair decision and its ramifications for small businesses and consumers. Witnesses offered a number of suggestions for how Congress should react to the decision.  Several organizations comprised of state legislators or representing state legislators argued that Wayfair resolved the issue at the federal level and that any further action should be left to the states.  Conversely, other witnesses suggested a moratorium on further state economic nexus laws as Congress considers whether to take action at a national level.  Some witnesses also asked Congress to pass legislation adopting uniform economic nexus standards to prevent a patchwork of economic nexus laws across the U.S.

Congress has long considered, but never passed, legislation to address remote sales and economic nexus.  The Marketplace Fairness Act (“MFA”) is the most recent proposal for implementing a nationwide sales tax nexus regime.  However, the bill remains in committee in this Congress and has failed in other recent Congresses.  The MFA, as currently proposed, would allow member states under the Streamlined Sales and Use Tax Agreement to collect sales taxes from remote sellers as long as the state meets the Streamlined Sales and Use Tax Agreement requirements and the remote seller has annual gross receipts from remote sales in the U.S. exceeding one million dollars ($1,000,000).

Several witnesses at the hearing also raised concerns that Wayfair might give rise to expanded nexus application outside the sales tax context, such as for corporate or personal income tax purposes.  To address this, some witnesses suggested legislation similar to the 2015 Business Activity Tax Simplification Act (“BATS Act”), which did not pass.  The BATS Act would have limited when states can establish nexus for taxation purposes.  As initially drafted, the bill would limit the reach of Wayfair by requiring physical presence to establish nexus for net income tax and business activity tax purposes, but in light of the Supreme Court decision, the breadth of future versions of the bill remains unclear.

We believe it is unlikely any legislation addressing Wayfair will make it through Congress before the end of the year.  Therefore, it would be up to a new Congress to propose and pass legislative solutions to some of the risks (especially risks involving differing state nexus laws) businesses face because of the Wayfair decision.  

Closing Thoughts

As illustrated by this series, the impact of Wayfair in both states with and without economic nexus requirements will continue to play out in the coming weeks and months.  It can be expected that the more aggressive taxing jurisdictions will seek to move the goalposts set by the Court, and it remains to be seen if such efforts can survive the legal battles that are sure to follow.  While the repercussions of Wayfair continue to play out, providers are left to create, implement and maintain their internal tax strategies against a backdrop of uncertainty.

That said, there are a number of proactive steps that businesses can take now.  As discussed above, companies concerned about the impact of retroactive tax liability could consider establishing a reserve to cover the costs of potential exposure.  We also recommend that companies review, create, modify, and implement tax compliance strategies based on the impacts resulting from Wayfair and continue to monitor developments in state and federal law in the wake of Wayfair.  For example, businesses can and should begin to evaluate the costs incurred every month by filing returns that pay pennies or a few dollars and consider whether they could benefit from Wayfair by reducing the states, and more importantly localities, where they are now reporting and remitting taxes.  Given the complexities stemming from Wayfair and the lack of uniformity among the various taxing jurisdictions, we highly recommend that providers work with experienced transaction tax counsel or accounting professionals before making any substantive changes to their current tax compliance and reporting strategies.  

Lastly, the uncertainty created by Wayfair also provides opportunities for businesses to have their voices heard through both the state and federal legislative processes.  At both the state and federal level, businesses could benefit by working with lawmakers to help craft legislation that is favorable to their interests and that brings uniformity to how remote sellers are taxed across the United States.

If you have any questions about how economic nexus laws may impact your business’s online or other remote sales, please contact Allison Rule at, Jackie Neff at, or Seth Williams at

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