The impact of economic nexus on sales tax and income tax

Update 10.3.2019: Pennsylvania will apply economic nexus to corporate net income tax for tax periods beginning on or after January 1, 2020. Updated 10.8.2019 to add information about P.L. 86-272.

The United States Supreme Court decision South Dakota v. Wayfair, Inc. enables states to require out-of-state businesses with no physical presence in the state to collect and remit sales tax. This is a departure from precedent. Until the June 2018 ruling, states were limited to taxing sales by businesses with a physical presence in the state. The Wayfair decision allows states to base a sales tax collection obligation solely on economic activity in a state (economic nexus).

Although Wayfair centered on sales tax, “its nexus analysis applies equally in the context of an income tax” (Shirley Sicilian of KPMG, Wayfair in the Context of Income Tax).

States source sales to the location of the seller (origin sourcing) or the consumer (destination sourcing). They typically use destination sourcing rules for remote sales of tangible personal property, intangible property, or services delivered into the state: The delivery address or the location where the service was received is generally considered the location of the sale.

It can be more complicated to determine income tax nexus, particularly when businesses deal in intangibles that are difficult to source, like digital goods and services. Sicilian predicts there will be “increased controversy in the future.” Controversy over the issue may start next year, when Hawaii begins enforcing income tax economic nexus and Texas enforces franchise tax economic nexus. 


Hawaii was one of the first states to apply economic nexus to sales tax, which is actually a general excise tax* (GET). It’s been enforced since July 1, 2018.

A person with no physical presence in Hawaii is engaging in business in Hawaii if, in the current or preceding calendar year:

  • The person’s gross income or gross proceeds from the sale of tangible personal property delivered into Hawaii, services used or consumed in Hawaii, or intangible property used in the state is $100,000 or more; or
  • The person sold tangible personal property delivered into the state, services used or consumed in the state, or intangible property used in the state in 200 or more separate transactions.

Earlier this year, lawmakers in the Aloha State decided to apply economic nexus to Hawaii income tax, too.

Thus, beginning with taxable years after December 31, 2019, Hawaii will enforce an economic nexus standard for Hawaii income tax (SB 495 SD2 HD1). A person with no physical presence in Hawaii is subject to Hawaii income tax if, during the current or preceding calendar year:

  • The person engages in 200 or more business transactions with persons in the state; or
  • The sum of the value of the person’s gross income attributable to sources in Hawaii equals or exceeds $100,000, or for a person that does business within and without the state, the numerator of the person’s sales factor for the state equals or exceeds $100,000.


Texas will enforce sales tax economic nexus starting October 1, 2019. Remote retailers with at least $500,000 in total Texas revenue in the preceding 12 calendar months are required to obtain a sales tax permit and collect and remit sales and use tax. The threshold is based on sales of taxable and exempt tangible personal property and services.

To ease the burden on remote sellers with economic nexus, Texas is allowing them to collect a single local tax rate. Instead of calculating and remitting the various tax rates in effect throughout the state, remote sellers may opt to collect one local rate plus the state rate. For 2019, the single local tax rate is 1.75 percent, for a total state and local rate of 8 percent. Remote sellers wishing to take advantage of this opportunity must notify the Texas Comptroller Account Maintenance Division.

Just as economic nexus is being applied to income tax in Hawaii, it’s being applied to franchise tax in Texas. Starting with franchise reports due after January 1, 2020, an entity with no physical presence in Texas has nexus with the state and is subject to Texas franchise tax if, during its federal income tax accounting period, it had gross receipts of $500,000 or more from business done in Texas.

Other states (and cities), other taxes

Gross receipts taxes like Washington state’s B&O tax are also targets for economic nexus. In fact, out-of-state businesses making retail sales into Washington are subject to B&O tax in 2019 if they meet either of the following economic nexus thresholds:

  • More than $285,000 of yearly gross receipts sourced or attributed to Washington in 2018 or 2019
  • At least 25 percent of total yearly gross receipts sourced or attributed to Washington in 2018 or 2019

According to the Washington State Department of Revenue, “Meeting either one of these thresholds establishes nexus even if the out-of-state business has no physical presence in Washington.” Nexus thresholds are based on a business’s receipts in the current or prior year.

Economic nexus rules have also been adopted by a couple of cities: Portland, Oregon, and San Francisco, California.

Voters in Portland approved a Clean Energy Surcharge in November 2018. It requires retailers with more than $1 billion in total annual retail revenue and more than $500,000 in Portland annual retail revenue to pay a 1 percent surcharge on gross revenue from retail sales within Portland, effective January 1, 2019 (penalties and interest kick in January 1, 2020).

Economic nexus also applies to certain taxes in San Francisco. As of January 1, 2019, a business that receives more than $500,000 in total gross receipts in San Francisco during the tax year is required to register and pay gross receipts tax, payroll expense tax, and other taxes. Additional requirements will take effect January 1, 2021. See the City and County of San Francisco Treasurer & Tax Collector for additional details.

It will be interesting to see which states, if any, follow the lead of Hawaii and Texas with respect to extending economic nexus to franchise or income tax — or if any cities are inspired by Portland and San Francisco. Several states, including Louisiana and New York, levy a franchise tax on businesses for the right to do business in the state; all but six states levy a corporate income tax.

To learn more about sales tax economic nexus, check out our state-by-state guide to sales tax economic nexus laws.

Note: Public Law 86-272 prohibits the imposition of a net income tax derived within a state ("or political subdivision thereof") from interstate commerce if business activities in the state are limited to solicitation of orders for tangible personal property. 

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