The Wayfair Ruling’s Impact on Out of State Financial Institutions: Possible Changes to Franchise Tax and Income Tax Nexus

In June 2018, the US Supreme Court reversed South Dakota v. Wayfair (Wayfair) and found South Dakota could impose sales and use tax on remote sellers that don’t have physical presence. This could have possible implications for multistate financial institutions' income tax and franchise tax.

Who’s Affected

The Wayfair decision applies to sales tax nexus. However, as states seek to increase their tax base by taxing more out-of-state taxpayers, there’s some concern that states may attempt to create and apply lower nexus thresholds for financial institutions. These thresholds could be based on sales, payroll, or property.

This continues to be an evolving area in state taxation and could also play an important role in accounting for income tax liabilities on financial statements.

Wayfair and the Tax Landscape

Before Wayfair

In 1992, the US Supreme Court concluded in Quill v. North Dakota, that a seller must have physical presence in a state before a state could require a seller to collect and remit sales and use tax. However, a group of cases informally called the MBNA and Capital One cases, concluded that an economic nexus, or factor-presence nexus, was sufficient for purposes of satisfying the constitutional requirement of substantial nexus for income tax purposes.

The MBNA and Capital One cases can be viewed as early examples of states enacting economic presence standards that affect financial institutions that don’t have a physical presence within the taxing state.

For reference, factor-presence nexus creates a bright-line standard for certain factors—such as sales, property, or payroll. If a taxpayer exceeds any of the factors, the taxpayer established income tax nexus.

After Wayfair

On June 21, 2018, the US Supreme Court reversed the long-standing physical presence standard in South Dakota v. Wayfair, and found that South Dakota could impose sales and use tax on remote sellers that don’t have physical presence.

Wayfair potentially creates more certainty, confirming which activities create substantial nexus under the US Constitution and how factor-presence activity can be applied to sales and use tax. In a way, Wayfair can be seen as creating a de facto factor-presence benchmark for substantial nexus, which could potentially be construed as an acceptable standard for all types of taxes.

Broader Application

There’s reason to believe that some states will look to the Wayfair standards when attempting to require more out-of-state financial institutions file and pay income and franchise taxes, as was the case in the early MBNA and Capital One cases.

Factor-Presence Nexus Standards

In the early 2000s, enacted factor-presence nexus standards for income taxes were arguably aimed, in part, at financial institutions. This is evident from the historical MBNA and Capital One cases, wherein states took aim at out-of-state financial institutions with no direct physical presence within the taxing state.

As states continue to implement and adopt factor-presence thresholds for sales taxes in wake of Wayfair, those that don’t already have a clear threshold may potentially be able to use the Wayfair decision to adopt thresholds for income and franchise tax. Those states that currently have factor-presence thresholds could possibly lower those thresholds, making it easier to establish nexus.


To illustrate, New Jersey published guidance long before the Wayfair case that indicates physical presence isn’t required to establish nexus for income taxes, but doesn’t use factor-presence thresholds to demarcate how much activity is required to establish nexus. States utilizing this approach may be able to adopt the Wayfair thresholds to provide additional clarity to taxpayers.

On the other hand, states like New York that have higher factor-presence nexus thresholds for income tax—such as $1 million in sales—may be able to lower their thresholds to be more in alignment with those in the Wayfair case.

We’re Here to Help

For more information on the Wayfair case, see our previous Alert. To learn how the program could affect you or your organization, contact your Moss Adams professional or email

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