Your Definitive Guide to Sales Tax and Economic Nexus

Organizations must understand the impact of evolving sales tax nexus rules.

As states continue to make adjustments to their sales tax regulation, it’s essential for companies to understand what they must do to stay compliant. This guide will help businesses:  

Better understand economic nexus and how it impacts businesses

Know which states have a sales tax and are subject to economic nexus rules

Learn best practices and procedures for maintaining sales tax compliance

Comprehend the costs of failing to keep up with ever-evolving regulations

Properly implement and utilize applicable solutions to mitigate risk

The Wayfair Supreme Court case determined that states can enact remote collection requirements. Even if sellers do not have a physical location in a state, but still conduct sales into that state, can charge sales tax. Every state with a sales tax – even if at just the local level – has passed regulation with regard to economic nexus, which is created by either sales volume or number of transactions in a state.

Sales Tax

Annual Report: The Continuing Evolution of Sales Tax

With a large tax gap to pare down and coming out of a global pandemic, the expectation is that things will continue to grow more complex and confusing as jurisdictions grapple with how to collect revenue owed.

Read the report here

Table of contents

Is the time right for a sales tax nexus review?

Sales tax nexus is not static. As your company grows, expands and evolves, your nexus footprint will likely change as well. All too often, companies will not realize the compliance impact of those changes until they receive an unfriendly inquiry from a sales tax auditor. The time may be right to consider whether your company might benefit from instituting a nexus review protocol.

Read more about conducting a sales tax nexus review.

Sales tax trends for 2023

States appear to be recognizing that the regressive nature of sales tax, especially in an inflationary economy, supports targeted exemptions for basic human necessities. These two forces serve to make sales tax compliance both more important and more complex, and from the way it looks right now, more of the same is on tap for 2023.

Read more about what to expect in 2023 when it comes to sales tax.

Why sellers of software and digital goods must consider sales tax

Software and digital goods suppliers understandably have questions about sales tax. Where do my digital products or software have special tax treatment? How do I handle sales tax with bundled products? Should I consider the delivery method when applying sales tax rates? Businesses selling software or digital products cannot afford to keep sales tax as an afterthought. Understanding the right questions to ask about sales tax and how it applies to software and digital goods will ensure organizations can better gauge any potential tax liability.

Read more about sales tax for businesses selling software or digital products.

What you need to know about the proposed national sales tax

When it comes to consumption taxes, the United States has always taken a different approach than the rest of the world. There is a proposal, however, that is currently sitting in the U.S. House that would upend the U.S. tax system and more closely align it with the rest of the world. While this bill is extremely unlikely to become law, it’s worth taking a moment to examine how tax compliance would radically change if the bill is enacted and the United States adopts a national sales tax.

Read more about the proposed national sales tax.

How Sovos can help you maintain sales tax compliance and account for economic nexus

With more than 12,000 state and local tax jurisdictions across the country and nearly every state searching for ways to generate new revenue streams and close tax gaps, organizations must remain vigilant in maintaining sales tax compliance.

Learn more about Sovos sales and use tax solutions.

Frequently Asked Questions

Every state that has a sales tax has implemented regulations for economic nexus. This map provides more detailed breakdowns for each state with what remote sellers – and marketplace facilitators – must do to remain compliant. 

Just like with economic nexus rules for remote sellers, the rules can vary from one jurisdiction to the next for marketplace facilitators. Organizations cannot assume that they are compliant with all state requirements if they are compliant with one state’s marketplace facilitator rules. 

The taxability of software and digital products will vary across different taxing jurisdictions. Software-as-a-service (SaaS) can be categorized in numerous ways, meaning businesses must know what is being sold and how items are categorized to properly determine tax.

Yes. States are continuously working to find the right balance in bringing in the maximum amount of sales tax dollars without overburdening businesses. Several states have made changes to their economic nexus requirements since Wayfair was enacted.

Once again, this can vary from one state to the next. Typically, sellers must be compliant with economic nexus requirements on the next transaction after they cross the threshold. Closely monitoring the requirements in states where a business is not yet registered—but may soon be in the future—is critical to help with compliance. 

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