Sales tax compliance was a lot easier about a decade ago. For most businesses, if you didn’t have any physical presence somewhere, then generally that state could not ask you to collect its sales tax. This has changed in 2018.
According to United States sales tax statistics, there were 681 changes to sales tax rates and laws, including the creation of more than 335 new cities, counties, and districts to levy taxes, in the year 2025.
This was a record-high increase for ten years. Sales taxes form about 32% of states’ tax income and 13% of local government revenues, making it one of the most significant sources of revenue for governments.
Compliance with sales tax laws involves much more than calculating a single tax rate. It entails tracking multiple regulations across different states, economic nexus thresholds, and constant changes in sales tax rules.
On top of that, the rules get revised often enough that you need continuous oversight to stay ahead. According to davidcoffinlaw.com, whether you have received notice of an audit, a request from the IRS for additional information, or are seeking to appeal an audit, specific rules and procedures must be followed.
Keep yourself updated and learn how the nexus rules, marketplace facilitator laws, and state enforcement practices can help your businesses identify potential tax risks.
How Sales Tax Nexus Works Today
Sales tax in the United States is closely tied to a concept called nexus. This determines when a business is legally required to collect and remit sales tax in a state.
Sales tax nexus is different across the United States, even though the basic idea is the same. Nexus always means a tax obligation connection between a business and a state, but each state sets its own rules for what creates that connection and when tax collection is required.
Other states often make sales tax more complex in three major ways: higher or multiple local tax layers, different state tax rates, and more complex nexus rules such as California, New York, or Washington. What is Florida sales tax & how does it work? As Florida doesn’t have a personal income tax, state and local income largely comes from sales taxes and property taxes.
This landmark decision effectively established that states could require out-of-state vendors to collect and remit sales tax without any physical presence in a state based on economic activities.
The ruling led to every single state with a sales tax to pass an economic nexus requirement law. Thus, the modern-day concept is that a business may have multiple collection obligations across numerous states simultaneously due to customer location alone.
Physical Nexus
Physical nexus still applies, and it stays the easiest to understand. A business ends up creating physical nexus in a state by keeping, basically, any of these things around
- A store, office, showroom or warehouse
- Employees, independent contractors, or even sales representatives who are regularly working in the state
- Inventory sitting in the stack, even if it is inventory kept by a third-party fulfillment center
- Going to trade shows, or temporary business events, in those states that consider that activity nexus-creating
That third item has actually surprised a lot of e-commerce sellers. One example of this is a seller using Amazon’s FBA (Fulfilled by Amazon) program. They might have products placed in Amazon fulfillment centers located across several states. And each place or state where that inventory is located counts as a state where the seller has a physical nexus, even if the seller has no real direct presence there.
Economic Nexus
When a company is able to meet the sales threshold set by the state but has no physical presence there, economic nexus comes into effect.
Most states started using the $100,000 sales or 200 transactions standard based on South Dakota’s case. After 2018, however, the requirements changed. By 2025, 25 states stopped requiring the 200 transactions, setting only sales thresholds.
The $100,000 sales threshold was scrapped by Utah in July 2025 and Illinois in January 2026, making 18 states still apply the transaction requirement.
Still, the biggest states, like California, New York, and Texas, require the $500,000 sales threshold.
In general, if the sales exceed the state’s threshold, then registration and tax collection become necessary.
Marketplace Facilitator Laws and What They Mean for Sellers
The final major development regarding sales tax compliance involves the marketplace facilitator laws.
Marketplace facilitator laws differ from other requirements in the sense that they place the burden of tax collection on the marketplaces themselves, rather than the individual seller. Almost all states with a sales tax now require marketplace facilitator compliance.
Unfortunately, marketplace facilitator compliance is not required for sales conducted outside the marketplace. In order to comply with the law, sellers must still collect sales tax for purchases made through their website or via any wholesale avenue.
Research has shown that marketplace facilitator laws produce far more tax revenue than the economic nexus rules.
Taxability: Not Everything Is Subject to Sales Tax
Nexus will determine if the business is required to charge sales tax in the state, whereas taxability is used to determine what kind of product or service is taxable.
There is considerable variation from one state to another when it comes to taxability, depending on the type of product sold or service offered.
Some examples are food and groceries, digital products and software-as-a-service, clothing, machinery, and prescription drugs.
Even if an item qualifies for exemption, adequate documentation must be kept, including resale or exemption certificates.
What Sales Tax Audits Look Like and What Triggers Them
Following the Wayfair case, states have become stricter in enforcing sales tax rules through the use of data analytics to spot noncompliant companies.
During fiscal year 2023/24, California’s compliance system carried out in excess of 66,000 permit examinations, resulting in 500 or more audit referrals and recovering more than $127 million.
Examples of states with aggressive audit systems include California, Massachusetts, Washington, Wisconsin, and Illinois.
The penalty rate for non-payment of sales tax is quite high at 39% of the total tax in some jurisdictions, while interest on such unpaid taxes is charged from the day the payment became due.
If a business realizes that it previously had nexus, then it may end up owing back taxes as well as paying heavy penalties and interest.
Common audit triggers tend to include the following:
- Crossing an economic nexus threshold and not registering in the relevant state, even if it seems “temporary” or small at first
- Third-party data gets pushed to state tax authorities, including info that comes through marketplace platforms
- When something doesn’t line up between what you reported to the IRS and the sales volumes you later report to state tax agencies
- Former employees or competitors, filing complaints with state revenue departments
- Audit referrals that come out of a customer’s own audit, where the auditor says the seller is basically a vendor who should have been collecting the tax
Use Tax: The Obligation Most Businesses Forget
The use tax complements the sales tax and comes into play when an enterprise buys a taxable good or service without having paid any sales tax and then uses it in states that impose such taxes.
This means that if an out-of-state seller sells some equipment to you but fails to charge sales tax for it, you might be obliged to pay use tax to your home state.
Since most people tend to ignore the use tax, auditors check the purchasing history in a sales tax audit process looking for any use tax issues. Penalties and interest will apply just as in sales tax evasion cases.
The Compliance Exposure Is Measurable, and So Is the Path to Reducing It
Compliance with the sales tax requirements of 2025 has become a much more complicated process compared to pre-Wayfair times, with nexus rules changing constantly, nexus thresholds being revised, and states actively working on spotting non-compliant companies.
Businesses with open nexus questions may expect higher amounts of back taxes and penalties to arise.
A lot of states provide voluntary disclosure programs that can help companies avoid heavy penalties and restrict the time frame for collecting past amounts owed. However, when an audit starts, the window closes.
It is important to be aware of your sales tax obligations in all the jurisdictions you conduct business.
