What changed, and why it matters more than it sounds
For decades a state could only require you to collect sales tax if you had physical presence there — an office, employees, property. Sell into a state from out of state and the obligation sat with the buyer, who overwhelmingly did not pay it.
In 2018 the Supreme Court decided South Dakota v. Wayfair and removed the physical presence requirement. States may now impose a collection obligation based purely on economic activity, and every state with a sales tax has since adopted thresholds.
The practical consequence is that a company operating entirely out of one state can be legally required to register, collect and file in twenty others. Nobody sends you a notice when you cross a threshold. The obligation begins on its own, and the liability compounds quietly until someone looks.
This is a balance sheet problem, not a tax problem
Uncollected sales tax is your liability, not your customer's. You cannot go back and bill a customer from two years ago. Every month of unregistered selling into a state where you have nexus adds tax, interest and penalties to an amount you will eventually pay out of margin.
How the thresholds actually work
The common shorthand is "$100,000 or 200 transactions," and it is close enough to be dangerous. The variation between states is exactly where people get caught.
- The dollar amount. $100,000 in most states, $500,000 in California, Texas and New York.
- Whether transaction count counts at all. Many states have dropped the 200-transaction test entirely; others retain it, which catches low-price, high-volume sellers who are nowhere near the dollar threshold.
- What goes in the numerator. Some states measure gross sales, some measure retail sales only, some exclude exempt and wholesale sales. A wholesaler can cross a gross-sales threshold on entirely non-taxable revenue and still owe a registration.
- The measurement period. Previous calendar year, current calendar year, or a rolling twelve months, depending on the state.
- When collection starts. Some states require collection on the very next transaction after you cross; others give you until the first day of the following month or quarter.
Physical nexus did not go away
This is the most expensive misunderstanding in the area. Economic nexus was added to the old rules, not substituted for them. Physical presence still creates an obligation, at any revenue level, with no threshold to cross — and the modern ways of creating it are not obvious.
- Inventory in a third-party warehouse. If a fulfillment network moves your goods into a state, your property is in that state. This catches enormous numbers of sellers who have no idea where their inventory has been routed.
- A remote employee. One salesperson, engineer or support rep working from home in another state generally establishes nexus there, for sales tax and often for income tax and payroll registration too.
- Contractors acting on your behalf, including installers and in some states affiliate marketers.
- Trade shows, where several states have specific day-count rules.
- Owned or leased property of any kind, including equipment left at a customer site.
Pull your inventory placement report
If you use a fulfillment network, get the report listing every warehouse that has held your inventory. Sellers routinely find goods sitting in eight or ten states, several of which they never marketed into. Each is a physical nexus claim with no threshold protecting you.
Nexus is not the same as taxability
Having nexus in a state means you must register and file. It does not automatically mean your product is taxable there, and conflating the two leads people either to over-collect or to assume they are safe.
Tangible goods are taxable nearly everywhere, with food, clothing and medical items carrying state-specific exemptions. Services are the opposite: taxable in a minority of states and only for specified categories.
Software and SaaS is the genuinely difficult area. Some states tax SaaS as tangible personal property, some tax it as a data processing or information service at a reduced effective rate, and some do not tax it at all. The same subscription can be fully taxable, partly taxable and exempt in three neighboring states, and the classifications change by legislative session.
Digital goods — ebooks, courses, downloads, streaming — follow a similarly fragmented pattern and have been a focus of state legislation in recent years.
Marketplace facilitator rules, and the trap inside them
Every state with a sales tax now requires large marketplaces to collect and remit on behalf of their sellers. If all of your sales run through Amazon, Etsy, Walmart or eBay, the marketplace handles the tax on those transactions and you are largely covered for them.
The trap is what that does to your own obligations. In most states, marketplace sales still count toward your economic nexus thresholds even though the marketplace collected the tax. So a seller doing $90,000 through Amazon and $20,000 through their own website has crossed $100,000, has nexus, and owes registration and collection on the $20,000 — while believing the marketplace had it covered.
The other half of the trap is that having a registration means having a filing obligation, and returns are due whether or not you owe anything. Zero returns still have to be filed, and penalties for not filing accrue independently of whether tax was due.
Cleaning up exposure you already have
Most companies discover this problem two or three years in, usually during diligence or a lender review. Do not simply register and start collecting going forward — a new registration invites the state to ask how long you have been selling there, and the lookback period in most states is unlimited for unregistered sellers.
- Quantify first. Build sales by state by month for every year you have been operating, and overlay each state's threshold and effective date. You need the size of the problem before choosing a remedy.
- Determine taxability by state for what you actually sell. Exposure in a state where your product is exempt is a registration issue, not a tax issue, and that changes the economics.
- Consider a voluntary disclosure agreement where exposure is material. A VDA typically limits the lookback to three or four years, abates penalties, and sometimes reduces interest — in exchange for coming forward before the state contacts you. It is unavailable once they have.
- Register and start collecting in states where exposure is small or your product is exempt.
- Automate the ongoing compliance. Rate determination and filing across a dozen states is not a manual process, and the software costs far less than one missed filing.
- Monitor thresholds monthly. Growth creates new nexus continuously, and the whole point is to catch a crossing before it becomes a liability.
This surfaces in every acquisition
Sales tax exposure is a standard diligence item and a reliable source of escrow holdbacks and purchase price reductions. Buyers price unquantified exposure conservatively, which means an unaddressed problem costs more at exit than fixing it would have cost at any point before.