According to the Sales Tax Institute, every state in the U.S. that has a sales tax now has economic nexus rules that can require remote sellers to register, collect, and remit sales tax. According to the U.S. Census Bureau, e-commerce sales added up to $304.2 billion in the second quarter of 2025, accounting for 16.3 percent of total U.S. retail sales. These statistics illustrate why sales tax compliance is fast becoming a pressing concern for sellers who operate across state lines. Multistate and online sellers can be audited, assessed penalties, and be liable if they do not fulfill their nexus obligations and collect sales tax appropriately.
What Is Sales Tax Nexus And Why Wayfair Changed Everything
Nexus is the tax connection between a seller and a state that triggers the obligation to collect and remit sales tax. Before 2018, sellers needed a physical presence (such as employees, offices, or warehouses) in a state to create nexus. The Supreme Court decision in South Dakota v. Wayfair overturned that physical presence requirement and allowed states to impose tax collection duties based on economic activity alone. This ruling recognized that modern e-commerce does not align with tests that rely on physical presence and that requiring physical locations created artificial competitive advantages for remote sellers.
Since Wayfair, states have rapidly adopted economic nexus statutes that measure seller activity by dollar sales or transaction counts rather than physical location. The decision fundamentally shifted sales tax compliance from a concern primarily for brick-and-mortar retailers to a universal requirement for any business with substantial sales into a state.
How States Set Economic Nexus: Thresholds And Tests
Most states trigger economic nexus using one of two measures: total dollar sales into the state or the number of separate transactions. The most common threshold is $100,000 in annual sales, though some states also include a 200-transaction count. As of mid-2025, 15 states have eliminated their transaction-count thresholds entirely, including South Dakota, California, Colorado, Indiana, Iowa, Louisiana, Maine, Massachusetts, North Carolina, North Dakota, Utah, Washington, Wisconsin, and Wyoming, according to Avalara research.
Illinois will remove its transaction threshold on January 1, 2026. States measure these thresholds over different evaluation periods (current calendar year, previous calendar year, or rolling 12 months), and they define what counts toward the threshold differently (some include exempt sales, others do not). Thresholds and rules change frequently as state legislatures adjust tax policy. Financial professionals should check state Department of Revenue pages or centralized trackers such as the Tax Foundation’s economic nexus guide or the Sales Tax Institute’s state-by-state chart at least quarterly to confirm current requirements.
Marketplace Facilitator Rules
A marketplace facilitator is a platform that lists products or services for sale on behalf of third-party sellers and processes payment or fulfillment for those sales. Examples include Amazon, eBay, Etsy, and Walmart Marketplace. All states with sales tax have enacted marketplace facilitator laws requiring these platforms to collect and remit sales tax on behalf of their sellers. The facilitator assumes the collection and remittance obligation even when the underlying seller would otherwise meet nexus independently.
Marketplace facilitator statutes generally apply when the platform exceeds the state’s economic nexus threshold (typically $100,000 in sales). Once a facilitator is collecting tax, the individual seller does not need to collect tax on those same sales again, though the seller may still need to register and report marketplace sales in some states. States enacted these laws to simplify compliance and close revenue gaps, and Avalara’s marketplace facilitator guide provides state-specific effective dates and requirements. Some states, including Texas and Wisconsin, require facilitators to notify sellers that they will collect tax on the sellers’ behalf.
Registering, Collecting, Filing, And Remitting
A multistate seller must first determine where it has nexus by reviewing its sales and transaction activity in each state against that state’s thresholds. Once nexus is established, the seller must register with the state’s tax authority, obtain a sales tax permit or license, and begin collecting tax on taxable sales delivered into that state. Registration typically requires basic business information, Federal Employer Identification Number, and details about the seller’s anticipated sales volume.
The collection requires determining the correct rate for each transaction. Most states use destination-based sourcing, meaning the seller must charge the combined state, county, city, and district tax rate at the customer’s delivery address. A minority of states (including Arizona, Illinois, Mississippi, Missouri, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia) use origin-based sourcing for intrastate sales, where the seller charges the rate at its own location. Sellers must also determine product taxability, as states vary widely on whether clothing, groceries, digital goods, software, and services are taxable. Avalara’s state rate tool and state Department of Revenue taxability matrices are essential resources for accurate rate and taxability lookups.
Once tax is collected, the seller must file returns (monthly, quarterly, or annually depending on volume) and remit the payments by the state’s due date. Late filing or late payment triggers penalties and interest, which vary by state. Sellers must also maintain detailed records of all sales, including customer location, amount charged, tax collected, exempt sales supported by valid exemption certificates, and filing confirmation. Most states require records to be kept for three to four years, though some specify longer retention periods.
Sales Tax Automation And When To Use It
Manual sales tax compliance becomes impractical once a seller has nexus in more than a few states. Tax automation software connects to a seller’s e-commerce platform, point-of-sale system, or accounting software and performs rate lookup, tax calculation, exemption certificate management, return preparation, and filing calendar tracking. Automation reduces error risk and frees accounting staff from repetitive data entry.
Automation is particularly valuable for businesses with high transaction volumes, diverse product catalogs, or sales into many jurisdictions. According to compliance research, sellers who rely on manual processes face higher audit rates and penalty assessments. The Census Bureau’s data showing e-commerce now represents more than 16 percent of total retail sales underscores the scale of cross-border transactions that require automated compliance support. Sellers should evaluate automation when they establish nexus in five or more states or when compliance tasks exceed 10 hours per month.
Audit Triggers, Penalties, And Common Pitfalls
State tax authorities audit sellers for multiple reasons. Common red flags include late or inconsistent registration, underreported sales compared to third-party data sources (such as credit card processors or marketplace reports), incorrect product taxability classification, failure to collect tax on shipping or handling charges, and missing or incomplete exemption certificates. Another frequent trigger is a seller that meets nexus but relies entirely on marketplace facilitator collection without understanding that some states still require seller registration.
Penalties vary by state but typically include late filing penalties (a percentage of tax due or a flat fee per return), late payment penalties (a percentage of unpaid tax per month), and interest on unpaid balances. Some states impose additional penalties for negligence or fraud. The Tax Foundation’s research provides comparative penalty structures across states. Most states have a statute of limitations of three to four years from the filing date or due date, though this period extends if a seller fails to register or file at all. Sellers should keep records for at least three to seven years, depending on state-specific statutes, and should document nexus determinations, taxability research, and filing confirmations to reduce audit risk.
Keeping Up To Date And Useful Resources
Sales tax laws change constantly. States adjust thresholds, add new taxable categories, modify filing frequencies, and update exemption rules. Financial professionals must monitor state Department of Revenue websites, subscribe to tax authority newsletters, and consult reputable third-party resources. Essential resources include:
- Streamlined Sales Tax Governing Board for member state simplification initiatives and registration systems
- Sales Tax Institute economic nexus guide for state-by-state threshold tracking
- Tax Foundation’s state tax data for policy analysis and threshold updates
- Avalara’s tax changes tracker for rate, rule, and marketplace facilitator updates
- Individual state Department of Revenue sites for official guidance, forms, and taxability matrices
Set a quarterly calendar reminder to review nexus obligations and check for threshold or rule changes in states where your clients or firm has established nexus.
Conclusion
Multistate sales tax compliance is now unavoidable for most online sellers. The Wayfair decision eliminated the physical presence rule and empowered states to enforce economic nexus based on sales volume or transaction count. Financial professionals must help clients identify nexus, register promptly, collect accurate tax, file timely returns, and maintain organized records. Correct process and reliance on authoritative sources reduce audit risk, penalty exposure, and competitive disadvantage. For practical compliance checklists and state-by-state reference templates, visit magicbooks.
FAQ:
1. What specific sales or transaction thresholds currently trigger economic nexus in most states?
The most common threshold is $100,000 in annual sales into a state. Some states also use a 200-transaction count, though 15 states eliminated their transaction thresholds in 2025, including California, Colorado, Indiana, and Washington. States measure these thresholds over different periods (current year, previous year, or rolling 12 months) and define what counts differently. Illinois will remove its transaction threshold on January 1, 2026.
2. If a seller only uses a marketplace (no direct website), which states require the marketplace to collect sales tax versus the seller?
All states with sales tax have enacted marketplace facilitator laws requiring platforms like Amazon, eBay, and Etsy to collect and remit tax on behalf of third-party sellers. The marketplace assumes the collection obligation when it exceeds the state’s economic nexus threshold (typically $100,000). Individual sellers do not collect tax again on marketplace-facilitated sales, though some states still require sellers to register and report those sales separately.
3. Can a seller rely on a marketplace facilitator’s collection to avoid registering in a state that the seller otherwise meets nexus in?
No, not in all states. While the marketplace handles collection and remittance for sales made through its platform, some states still require the underlying seller to register if the seller independently meets economic nexus thresholds. The seller should verify each state’s specific registration requirements even when a facilitator is collecting tax. Relying entirely on marketplace collection without understanding state-specific registration rules is a common audit trigger.
4. What exact documents or registration numbers do state tax authorities expect to see on a return filed by an out-of-state seller?
State tax authorities require the seller’s sales tax permit or license number, Federal Employer Identification Number (FEIN), and business legal name and address. Returns must report total sales, taxable sales, exempt sales, tax collected by jurisdiction, and any use tax due. Most states also expect documentation of exemption certificates for any claimed exempt transactions and records showing the customer’s ship-to address for destination-based sourcing.
5. How often do states change product taxability lists, and where should accountants check product taxability updates?
States update product taxability rules frequently, often during annual legislative sessions or through Department of Revenue guidance releases. Accountants should check state Department of Revenue websites quarterly for taxability matrix updates, particularly for categories like clothing, groceries, digital goods, software, and services. Reliable centralized resources include Avalara’s state-specific taxability guides, the Streamlined Sales Tax Governing Board’s taxability database, and Tax Foundation state policy updates.
6. What is the typical statute of limitations for state sales tax assessments and how long should records be kept?
Most states have a statute of limitations of three to four years from the filing date or due date for sales tax assessments. This period extends indefinitely if a seller fails to register or file returns at all. Sellers should retain all sales records, exemption certificates, filing confirmations, and supporting documentation for at least three to seven years depending on the state. Some states specify longer retention periods for certain types of records.
7. Which states offer amnesty or voluntary disclosure programs for sellers who register late, and how do those programs usually work?
Many states offer voluntary disclosure agreements (VDAs) that allow sellers to come forward, register, and pay back taxes in exchange for penalty relief and a limited lookback period (typically three to four years instead of unlimited). Amnesty programs are periodic initiatives with specific enrollment windows that may waive penalties entirely for a defined past period. States administer these programs differently, so sellers should contact the state Department of Revenue or work with a sales tax professional to negotiate terms before registering late.
8. What minimal data fields should a bookkeeping system capture to support multistate sales tax filings?
Bookkeeping systems must capture customer ship-to address (state, county, city, ZIP code), sale date, total sale amount, taxable amount, tax collected by jurisdiction, product or service category for taxability determination, and exemption certificate reference number for exempt sales. Systems should also track marketplace-facilitated sales separately, filing due dates by state, and payment confirmation numbers. These fields enable accurate return preparation, support audit defense, and ensure proper allocation of tax collected to the correct jurisdictions.
9. How do origin- vs. destination-based sourcing rules affect sellers that ship to multiple ZIP codes within a single state?
In destination-based states (the majority), sellers must charge the combined state, county, city, and district tax rate at each customer’s delivery address, meaning rates vary by ZIP code within the state. In origin-based states (including Arizona, Illinois, Mississippi, Missouri, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia), sellers charge the rate at their own business location for intrastate sales, simplifying rate lookup. Sellers shipping to multiple ZIP codes in destination-based states need automated rate lookup tools to ensure accuracy. Some states use mixed sourcing rules, applying destination sourcing for out-of-state sellers and origin sourcing for in-state sellers.
10. What immediate steps should a firm take if it receives a state sales tax notice or audit initiation letter?
Read the notice carefully to understand the issue, scope, and response deadline. Gather all relevant records (sales data, exemption certificates, prior filings, and nexus analysis documentation) immediately. Contact the state tax authority contact listed on the notice to confirm receipt and clarify any unclear requests. Consider engaging a sales tax professional or attorney experienced in the issuing state’s procedures, especially if the notice involves significant liability, multiple periods, or penalty assessments.
