Sales Tax Nexus for SaaS and E-commerce: A Practical Guide

Before 2018, you generally owed sales tax only where you had a physical presence. The Supreme Court's South Dakota v. Wayfair decision changed that. Today almost every state with a sales tax has an economic nexus rule, and growing online businesses can owe tax in dozens of states without realizing it.

What creates nexus today

Nexus is the connection that allows a state to require you to collect its sales tax. There are two main types:

• Physical nexus: an office, employee, inventory in a warehouse (including Amazon FBA), or regular in-person sales activity.
• Economic nexus: crossing a state's sales threshold, commonly $100,000 in annual sales into that state. Some states also count the number of transactions.

New York's threshold is higher than most: more than $500,000 in sales and more than 100 transactions in the previous four sales tax quarters.

Is your product even taxable?

Nexus is only half of the question. The other half is whether what you sell is taxable in that state.

• Physical goods are taxable almost everywhere, with exemptions for groceries, clothing and medical items in some states.
• SaaS is the most inconsistent category. New York, Texas, Washington, Pennsylvania and Ohio tax many SaaS products. California, Florida and Virginia generally do not.
• Digital products such as downloads and online courses follow yet another set of rules.

A product taxability matrix, one row per product and one column per state, is the foundation of any compliant setup.

The real cost of getting it wrong

When you do not collect sales tax, the liability does not disappear. It becomes yours to pay out of margin, plus interest and penalties. Uncollected tax also shows up during due diligence, where buyers and investors often require an escrow or price reduction.

In our experience, the average e-commerce brand that comes to us has nexus in eight to twelve states but is registered in two.

How to fix past exposure

If you discover nexus you have not acted on, you have options:

1. Voluntary disclosure agreements (VDAs). Most states will limit the lookback to three or four years and waive penalties if you come forward before they contact you.
2. Prospective registration. In low-exposure states, registering and collecting going forward may be enough.
3. Customer recovery. For B2B sales, you may be able to collect exemption certificates or bill customers for past tax.

Build a process, not a project

Once registered, compliance is ongoing. A reliable setup includes:

• A tax engine such as Avalara or TaxJar connected to Shopify, Stripe or your billing system
• Monthly monitoring of thresholds in states where you are not yet registered
• Exemption certificate management for wholesale and B2B customers
• Returns filed every period and reconciled to your general ledger

Where to start

Pull 12 to 24 months of sales by ship-to state and product, then compare them to each state's thresholds. If that sounds tedious, our sales tax compliance team delivers a complete nexus study in about two weeks.