Sales and Use Tax

Sales and use tax nexus refers to the connection between a business and a state that creates an obligation to collect and remit sales tax in that state. Historically, nexus was based on physical presence — having employees, offices, warehouses, or inventory in a state. The landmark 2018 Supreme Court decision in South Dakota v. Wayfair fundamentally changed this framework by allowing states to impose sales tax collection obligations based on economic presence alone — meaning a business can have nexus in a state simply by exceeding a threshold of sales into that state, even with no physical presence there. Most states have adopted economic nexus thresholds, commonly set at $100,000 in annual sales or 200 transactions into the state. This shift created significant new compliance obligations for businesses selling across state lines, particularly e-commerce sellers who may now have nexus in dozens of states. Businesses must monitor their sales into each state against applicable thresholds, register for sales tax collection when thresholds are met, and stay current on the more than 10,000 taxing jurisdictions across the country that may each have different rules, rates, and taxability determinations.

Marketplace facilitator laws have significantly shifted sales tax collection responsibilities for businesses that sell through third-party platforms like Amazon, eBay, Etsy, and similar marketplaces. Under these laws, which have been adopted by nearly all states, the marketplace facilitator is required to collect and remit sales tax on behalf of third-party sellers using their platform, rather than placing that obligation on each individual seller. This means businesses selling through qualifying marketplace platforms generally do not need to collect sales tax on sales made through those channels — the marketplace handles it automatically. However, businesses that also sell directly through their own websites, retail locations, or other channels outside the marketplace remain responsible for collecting and remitting sales tax on those direct sales. Marketplace facilitator laws also affect how businesses calculate economic nexus thresholds: in most states, marketplace-facilitated sales count toward the seller's nexus threshold even though the marketplace collects the tax. Businesses must carefully assess their full sales channel mix and applicable state rules to determine their complete sales tax compliance obligations, as the interaction between marketplace sales and direct sales can create unexpected nexus and filing requirements.

The taxability of digital products and services for sales and use tax purposes varies widely across states and remains one of the most complex and rapidly evolving areas of sales tax compliance. Unlike tangible personal property, which is taxable in most states, digital goods — such as software, streaming services, e-books, apps, and online courses — do not fit neatly into traditional taxability frameworks, and states have taken divergent approaches. Some states explicitly tax digital products, others exempt them, and many are actively updating their rules as technology evolves. Software as a service (SaaS) is taxed in some states as a software license, exempt in others as a service, and subject to varying partial exemptions in still others. The delivery mechanism matters in some jurisdictions: software delivered electronically may be taxed differently than the same software delivered on physical media. Businesses selling digital products must analyze taxability on a state-by-state basis, monitor legislative and regulatory changes that frequently affect this category, and be prepared for the fact that even well-researched positions in this area may be challenged during a state audit as authorities continue to interpret existing laws to cover new product types.

Certain states are consistently recognized as presenting elevated sales and use tax compliance risk for multistate businesses due to aggressive enforcement, complex or frequently changing rules, broad nexus interpretations, or unique taxability determinations. California has one of the most complex sales tax structures in the country with district-level tax rates that vary by location, aggressive economic nexus enforcement, and unique taxability rules for technology and digital goods. New York has expansive nexus rules, complex software and digital product taxability provisions, and active audit activity particularly around nexus affiliates and marketplace sellers. Texas has a broad sales tax base, significant revenue from sales tax audits, and particular complexity around services and digital goods. Washington State has been at the forefront of marketplace facilitator legislation and economic nexus enforcement. Colorado has implemented unique sales tax structures with home-rule jurisdictions that operate independently of the state system, creating significant complexity for multistate sellers. Businesses should conduct a regular risk assessment across all states where they have potential nexus, prioritizing review and compliance efforts in jurisdictions with the highest enforcement activity and the greatest dollar exposure based on their specific sales mix.

Protecting a business from sales and use tax penalties and audit exposure requires a proactive, systematic compliance approach across all jurisdictions where nexus exists. Key protective strategies include conducting a nexus study — a comprehensive analysis of all business activities across states to identify current and potential nexus obligations — and registering for sales tax collection in all required states before thresholds are breached. Maintaining complete and organized exemption certificates for all exempt sales is critical: during a state audit, an exemption claimed without a valid, signed certificate on file will typically be assessed as taxable. Reconciling sales tax returns to sales records monthly before filing reduces the risk of filing inaccuracies that trigger audit red flags. Businesses that discover historical non-compliance should consider voluntary disclosure agreements (VDAs), which most states offer to allow businesses to come forward proactively in exchange for limited lookback periods and waived penalties. Investing in sales tax automation software — which integrates with billing systems to calculate rates in real time and supports filing across multiple jurisdictions — significantly reduces manual error risk for businesses with high transaction volumes. Regular training for accounts receivable and billing staff on exemption certificate requirements and nexus triggers completes a robust compliance program.