Before 2018, the general rule for sales tax was simple: if you did not have a physical presence in a state, you did not have to collect sales tax from customers in that state. The Supreme Court's decision in South Dakota v. Wayfair changed that. The new rule is based on economic activity, not physical presence, and it has created substantial compliance obligations for online businesses that were not building those obligations into their operations.
The consequence is that a meaningful number of e-commerce companies, SaaS businesses, and other online sellers are currently not compliant with their state tax obligations, and the liability is growing every month they continue selling without addressing it.
What Nexus Means
Nexus is the legal term for a sufficient connection between a business and a state that creates a tax obligation in that state. When nexus exists, the business must collect and remit sales tax on taxable transactions, and in some cases must file an income tax return in that state as well. Before Wayfair, nexus required physical presence. After Wayfair, nexus can exist based on economic activity alone.
There are two primary types of nexus to understand: physical nexus and economic nexus. Most businesses with any physical footprint understand physical nexus intuitively, even if they do not use that term. Economic nexus is newer, less intuitive, and is the primary compliance risk for online businesses.
Physical Nexus
Physical nexus is created by having a tangible presence in a state. An office creates nexus. Employees working from that state create nexus. Inventory stored in a warehouse or fulfillment center in that state creates nexus. A salesperson who regularly travels to that state and conducts business there may create nexus. A trade show booth operated for a brief period may create nexus in some states, though states vary on how much physical activity triggers the obligation.
For e-commerce companies using Amazon FBA or similar third-party fulfillment services, inventory placement is a particularly important nexus consideration. If Amazon stores your inventory in a fulfillment center in Ohio, you have physical nexus in Ohio and are required to collect Ohio sales tax on sales to Ohio customers, even if you are based in California and have never personally set foot in Ohio.
Economic Nexus After Wayfair
Economic nexus thresholds vary by state, but the most common standard is $100,000 in sales or 200 transactions in a 12-month period within a given state. If you exceed either threshold in a state, you have economic nexus there and must register to collect sales tax, file returns, and remit the tax collected.
As of the time of this writing, every US state with a sales tax has enacted economic nexus laws following Wayfair. The thresholds and specifics vary, but the principle is universal. Some states have eliminated the transaction count threshold entirely and use only the dollar threshold. A few have thresholds higher or lower than $100,000. The safest approach is to track sales by state and get a nexus analysis once any state approaches the common threshold.
The exposure for businesses that have been selling for several years without tracking this is significant. Many states allow lookback periods of three years or more for unregistered sellers who were required to collect. That means three years of uncollected sales tax, plus interest and penalties, is potentially on the table.
How Remote Employees Create Nexus
One of the most common and least anticipated nexus triggers for growing startups is remote employees. When a startup hires its first employee in a new state, that employee's presence creates physical nexus in that state for income tax purposes, and potentially for sales tax purposes depending on the employee's role and the state's rules.
This happens with surprising speed in fast-growing companies. A company based in New York hires a salesperson in Texas, an engineer in Colorado, and a customer success manager in Florida. Within a year, that company may have income tax filing obligations in four states, payroll tax accounts in four states, and sales tax nexus in three or four states, all from hiring decisions that were made on the basis of finding the right candidates, not on the basis of tax planning.
None of this means you should not hire the best candidates wherever they are located. It means you should understand the tax implications before you hire and set up the proper accounts and compliance before the first paycheck, not when an audit notice arrives.
Product Taxability: Not Everything Is Taxable Everywhere
Once you establish nexus in a state, the next question is what you are actually required to collect tax on. This varies significantly by product type and by state, and the variation is one of the most confusing aspects of multi-state sales tax compliance.
SaaS (software as a service) is taxable in approximately half of US states and not taxable in the other half. Digital downloads of music, e-books, or software are taxable in some states, exempt in others. Professional services are generally not subject to sales tax, but some states tax certain services. Bundled transactions, where a taxable product is sold together with an exempt service, have their own rules that vary by state.
For businesses selling across multiple states, the product taxability question is not something you can answer once and apply everywhere. It requires a state-by-state analysis of your specific products and how each state classifies them.
What Happens With Unreported Nexus
Businesses that have nexus but are not registered and not collecting sales tax are accumulating a liability that consists of three components: the uncollected tax itself (which you were supposed to collect from customers but did not), interest accrued from the date each transaction occurred, and penalties for non-compliance.
The uncollected tax is typically the seller's responsibility even if they did not collect it from the buyer. Saying "we did not know we had nexus" does not eliminate the liability -- states have taken the position that sellers are responsible for knowing where they have nexus and meeting their obligations.
Most states offer Voluntary Disclosure Programs (VDPs) that allow businesses to come forward and disclose their non-compliance voluntarily. In exchange, states typically cap the lookback period (often to three or four years regardless of how long the non-compliance actually lasted), waive penalties, and sometimes reduce interest. For a business with five years of uncollected sales tax across multiple states, the voluntary disclosure program can reduce liability substantially compared to waiting for an audit.
The Cost of Getting Compliant Proactively vs. Being Caught
The math on this comparison is almost always clear. Proactive compliance involves: a nexus analysis to identify your exposure states (a few hundred to a few thousand dollars), voluntary disclosure applications (attorney fees plus the tax and interest you owe for the lookback period), and registration and ongoing compliance in each state where you have nexus.
Being caught in an audit involves: the full lookback period with no cap, maximum penalties, the cost of defending the audit, and the reputational risk of a state tax lien. Audits also rarely stay confined to one state. A state that conducts a successful sales tax audit often shares information with other states, and a finding in one state can trigger inquiries in several others simultaneously.
The proactive path is less expensive in almost every scenario. The only reason to delay is if you genuinely have no nexus to disclose, in which case the cost of a nexus analysis to confirm that is a good investment regardless.
When to Get a Tax Advisor
Any online business that has crossed $100,000 in sales into a single state outside their home state should get a nexus analysis. Any business that has hired remote employees across state lines should understand the nexus implications of those hires. Any business that is planning an acquisition, raising institutional capital, or preparing for an exit should have clean state tax compliance before entering due diligence -- state tax exposure is a common due diligence finding that can create significant friction in a transaction.
For broader guidance on tax planning for business owners, see the complete guide to tax planning for business owners. If you are relying on AI tools for tax guidance, our post on why you should never ask ChatGPT for tax advice explains the specific risks of that approach in multi-state tax situations.
