Understanding Sales Tax Nexus and Recent Changes in State Laws

Sales tax nexus arises when a business has sufficient contacts with a state that it can be required to collect and remit sales taxes on sales to customers in that state. Traditionally, nexus was established through physical presence, such as:

• Owning or leasing property
• Having employees or agents
• Storing inventory
• Conducting in-person sales activities, such as attending trade shows or exhibitions

Since the landmark South Dakota v. Wayfair, Inc. Supreme Court decision in 2018, which expanded the nexus requirement to include economic nexus, states have continued to expand the criteria for what establishes sales tax nexus. With the growth of the digital economy and e-commerce, state tax laws have adapted to ensure businesses with significant sales, but with no physical presence, contribute to state tax revenues. Understanding these changes is essential for businesses to remain compliant and avoid significant exposure and penalties.

The new, broader standard of “economic nexus” looks to the volume of gross sales or the number of transactions a business conducts in a state, regardless of whether the business has physical presence. A few states review both the gross sales volume and the number of transactions as part of economic nexus considerations.

The Supreme Court’s ruling aimed to level the playing field between brick-and-mortar retailers and online businesses. All states with a state sales tax have now adopted economic nexus thresholds, creating a patchwork of regulations that every business must navigate.

Recent Changes in State Sales Tax Nexus Laws

Since Wayfair, states have continued to refine their sales tax nexus laws. Some notable trends and updates include the following:

• Lower economic nexus thresholds: Initially, several states adopted thresholds similar to South Dakota (original thresholds of $100,000 in sales or 200 transactions). However, some states have since adjusted these thresholds. For example:

  • In 2024, Indiana, North Carolina and Wyoming eliminated the transaction count criterion.
  • Several other states recently changed their laws to focus solely on business revenues including Louisiana, South Dakota and Maine.

• Marketplace facilitator laws: Many states have enacted laws requiring sales and use tax collections by marketplace facilitators, like Amazon, eBay and Etsy, on sales in the state. This has reduced the compliance burden on small sellers but has created new complexities for marketplace operators.

• Increased focus on remote work: As remote work became widespread in the aftermath of the pandemic, the lines blurred regarding physical presence. States have revisited nexus rules to address situations where remote employees create nexus for their employers. Some examples include:

  • New Jersey clarified that the presence of remote employees working from home could establish physical nexus.
  • Other states have issued guidance to address temporary versus permanent remote work scenarios.

• Digital goods and services taxation: As the digital environment grows, states are increasingly taxing digital goods and services. This shift can create sales tax collection obligations for a business that sells digital products or services across state lines. States that now require businesses to collect sales tax on software, e-books and streaming subscriptions include Washington and Pennsylvania.

Challenges for Business

The evolving landscape for sales and use tax nexus presents challenges for businesses operating across multiple states. Businesses often face the following:

• Compliance costs: Tracking and complying with various state laws can be expensive, especially for small businesses.
  
• Audit risk: Failing to collect or remit sales tax timely and properly can result in substantial penalties, interest and additional audits.
• Technology needs: Businesses may need specialized software to manage tax collection, filing returns or tracking exemption certificates across multiple jurisdictions. 

Now that sales tax nexus is no longer limited to physical presence, a dynamic regulatory environment has been created out of the rise of economic nexus coupled with state-specific changes. It is essential to stay informed about recent developments, such as lower thresholds, marketplace facilitator laws, and digital goods and services taxation. Due to the complexity of sales taxes, it is recommended to consult with a sales tax specialist to identify the best approach to becoming and staying compliant. 

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Breea Boylan Breea Boylan, CPA, is a supervisor on the State and Local Tax team at Withum and can be reached at bboylan@withum.com.

Courtney Easterday Courtney Easterday, MSA, is a senior tax manager at Withum.