What Is the Wayfair Tax for Your Business?

The term “Wayfair tax” comes from the landmark 2018 Supreme Court case, South Dakota v. Wayfair, Inc., which fundamentally altered the rules for sales tax collection. Before this decision, a state could generally only require a business to collect its sales tax if it had a physical presence, like a store or warehouse, within that state. The Wayfair decision eliminated this long-standing physical presence requirement.

The court case established a new standard known as “economic nexus.” This concept allows states to mandate sales tax collection from remote sellers, such as e-commerce businesses, if their sales into that state exceed certain economic thresholds. This shift means that a business located entirely in one state could now have a legal obligation to register for, collect, and remit sales tax in dozens of other states.

Determining Economic Nexus

A business establishes economic nexus in a state when its sales or transaction volume into that state exceeds a specific threshold within a set timeframe. This analysis requires a review of a company’s sales data against the rules set by each individual state.

Economic nexus thresholds are most often based on a remote seller’s total sales revenue into a state, with a common threshold being $100,000 in gross sales. Historically, many states also used a second threshold based on the number of separate transactions, such as 200 individual sales. However, to simplify compliance, many states have eliminated their transaction-based thresholds.

To evaluate whether a threshold has been met, states use a “lookback period.” While this is often the previous or current calendar year, many states require businesses to evaluate their sales on a rolling basis, such as over the trailing 12 months.

The definition of what constitutes a “sale” can also differ, with some states including exempt sales in their threshold calculations while others only count taxable sales. This detailed, state-by-state review is a continuous process as a business grows.

Information and Documentation for Registration

Once a business determines it has economic nexus in a state, the next phase involves gathering the necessary information and documents for registration. Preparing these items in advance streamlines the application process.

Key business information is a primary requirement. This includes the legal business name and any “Doing Business As” (DBA) names, the primary business address, and the corporate structure, such as a sole proprietorship, LLC, or corporation. Applicants will also need their Federal Employer Identification Number (EIN) and the North American Industry Classification System (NAICS) code that best describes their business activity.

In addition to corporate details, states require personal information for the principal officers, owners, or partners. This typically includes the full legal names, home addresses, and Social Security Numbers of these individuals.

A piece of data for the registration process is the date the business first met the economic nexus threshold in that state. This date establishes when the sales tax collection obligation began and is used to determine the first period for which a tax return is due. Finally, the business will need to provide its bank account information, including the routing and account numbers, to facilitate the electronic payment of remitted sales tax.

The State Sales Tax Registration Process

After compiling all the necessary information, the business can register for a sales tax permit. Most states have modernized this process, offering an online portal as the primary method for submission. These portals guide applicants through a series of steps, prompting for the specific information gathered beforehand.

Upon completing the online application, the system will provide an immediate confirmation that the submission has been received, often as a confirmation number or an email. This confirmation serves as proof that the application has been filed with the state’s department of revenue.

Following the initial submission, the state agency will process the application, which can range from a few days to several weeks. Once approved, the business will receive its official sales tax permit or license.

This document, delivered electronically or by mail, contains the sales tax account number and officially authorizes the business to collect sales tax. The notification will also specify the assigned filing frequency—typically monthly, quarterly, or annually—based on the anticipated volume of sales tax.

Ongoing Sales Tax Compliance

Successfully registering for a sales tax permit marks the beginning of a business’s ongoing compliance responsibilities. These obligations involve the accurate calculation, collection, filing, and remittance of sales taxes.

The first step is calculating and collecting the correct amount of tax on each transaction. This can be complex because tax rates often vary based on the customer’s location, and a single sale may be subject to a combination of state, county, city, and special district taxes. Businesses must have systems in place to identify the correct rate for every address to which they ship goods.

After collecting the tax, the business must periodically file a sales tax return with the state’s taxing authority. The return is a report that summarizes the business’s total sales, taxable sales, and the amount of sales tax collected during the reporting period.

The final step is to remit the collected sales tax to the state. This payment is due at the same time the sales tax return is filed, and most states mandate that payments be made electronically. Timely filing and remittance are necessary to maintain good standing and avoid interest and penalties on late payments.