Sales tax compliance in the USA has become significantly more complex since the landmark Supreme Court ruling in South Dakota v. Wayfair, Inc. (2018). Before Wayfair, a business was generally required to collect and remit sales tax only if it had a physical presence, such as an office, warehouse, or employees, in a state. The Wayfair decision fundamentally changed this framework by allowing states to impose economic nexus obligations on out-of-state sellers based solely on sales activity.
Today, businesses selling goods or services across state lines, whether e-commerce companies, SaaS providers, digital marketplaces, or foreign entities entering the U.S. market, must carefully evaluate their sales tax nexus exposure in every state where they have customers. Failure to comply can result in penalties, interest, audits, and reputational risk.
This comprehensive guide explains sales tax compliance in the USA after Wayfair, covering nexus rules, thresholds, registration, filing, exemptions, and practical compliance strategies for domestic and international businesses.
Understanding Sales Tax in the USA
Unlike many countries with a centralised VAT or GST system, the United States operates a decentralised sales tax regime. Sales tax is imposed at the state and local levels, with no federal sales tax.
Key Features of the U.S. Sales Tax System
- 45 states + Washington, D.C. impose a statewide sales tax
- Thousands of local jurisdictions (counties, cities, special districts) may impose additional tax
- Each state defines its own:
- Taxable goods and services
- Tax rates
- Filing frequencies
- Nexus standards
This fragmented structure makes sales tax compliance in the USA particularly challenging, especially after the expansion of nexus rules post-Wayfair.
What Is Sales Tax Nexus?
Sales tax nexus refers to the level of connection between a business and a state that obligates the business to collect and remit sales tax in that state.
If a nexus exists, the business must:
- Register for a sales tax permit
- Collect the correct tax from customers
- File periodic sales tax returns
- Remit tax to the state
Pre-Wayfair Nexus Standard: Physical Presence
Before 2018, nexus was primarily triggered by physical presence, such as:
- Office or place of business
- Employees or sales representatives
- Warehouses or inventory
- Trade show attendance (in some states)
Remote sellers without physical presence were generally not required to collect sales tax.
The Wayfair Decision: A Turning Point
In South Dakota v. Wayfair, Inc., the U.S. Supreme Court ruled that physical presence is no longer required to establish sales tax nexus. The Court recognised that the growth of e-commerce rendered the old standard outdated and allowed states to enforce tax-collection obligations based on economic activity.
Key Outcomes of the Wayfair Ruling
- States can impose economic nexus rules
- Remote sellers may have sales tax obligations without physical presence
- States must avoid undue burden on interstate commerce
Following Wayfair, nearly every sales-tax-imposing state adopted economic nexus laws.
Economic Nexus Explained
Economic nexus is established when a business exceeds a state-defined threshold of sales or transactions, even without physical presence.
Common Economic Nexus Thresholds
Most states follow thresholds similar to South Dakota’s model law:
- $100,000 in gross sales, or
- 200 separate transactions in a calendar year
However, thresholds vary by state, and many states have eliminated the transaction count test.
Examples of Economic Nexus
- An Indian SaaS company earns $120,000 annually from U.S. customers in California → nexus established
- An e-commerce seller completes 250 transactions in New York → nexus established
- A foreign Amazon seller that exceeds Texas’ revenue threshold → must register and collect tax
Economic nexus applies to both U.S. and foreign businesses.
Types of Nexus Businesses Must Monitor
Post-Wayfair, businesses must evaluate multiple nexus types simultaneously.
1. Physical Nexus
Still relevant and triggered by:
- Offices, employees, or contractors
- Inventory stored in warehouses or fulfilment centres
- Trade shows or installations
2. Economic Nexus
Triggered by exceeding sales or transaction thresholds in a state.
3. Affiliate Nexus
Arises when:
- Related entities or affiliates operate in a state
- Referral agreements with in-state businesses generate sales
4. Marketplace Nexus
Many states require marketplace facilitators (e.g., Amazon, Shopify, Etsy) to collect tax on behalf of third-party sellers.
However, sellers may still have:
- Registration requirements
- Reporting obligations for non-marketplace sales
State-Wise Nexus Threshold Variations
There is no uniform nexus threshold across all states. Examples include:
- California: $500,000 in sales (no transaction test)
- Texas: $500,000 in gross receipts
- New York: $500,000 + 100 transactions
- Florida: $100,000 in sales
- Kansas: Initially, no threshold (later clarified via guidance)
Businesses must track sales state-by-state to determine compliance obligations.
Taxable vs. Non-Taxable Sales
Sales tax does not apply uniformly to all products and services.
Commonly Taxable Items
- Tangible personal property
- Prepared food and beverages
- Certain digital goods (state-specific)
Common Exempt or Conditionally Taxable Items
- Groceries (often taxed at reduced rates or exempt)
- Prescription medicines
- Software-as-a-Service (taxability varies widely)
- Professional services
Understanding product taxability by state is critical to accurate compliance.
Sales Tax Registration Requirements
Once a nexus is established, registration is mandatory before collecting tax.
Registration Process
- Apply through the state’s Department of Revenue
- Obtain a sales tax permit
- Configure tax collection systems
Late registration can trigger:
- Back taxes
- Penalties and interest
- Audit exposure
Foreign companies typically require:
- U.S. entity or foreign registration
- ITIN or EIN
- Authorised representative or fiscal agent (in some states)
Collecting Sales Tax Correctly
Sales tax collection involves more than applying a flat rate.
Key Considerations
- Destination-based vs. origin-based taxation
- State, county, city, and special district rates
- Product-specific exemptions
- Customer exemption certificates
Incorrect rate application is one of the most common compliance errors identified in audits.
Filing and Remitting Sales Tax Returns
Filing Frequency
States assign filing frequency based on sales volume:
- Monthly
- Quarterly
- Annually
Filing Obligations
- File returns even if no tax is due (zero returns)
- Meet strict due dates
- Maintain supporting documentation
Late filings can result in:
- Monetary penalties
- Interest charges
- Suspension of permits
Sales Tax Audits After Wayfair
Post-Wayfair enforcement has increased significantly.
Common Audit Triggers
- High remote sales volume
- Inconsistent filings
- Marketplace vs. direct sales discrepancies
- Customer complaints or whistleblower tips
Audit readiness requires:
- Clean sales records
- Accurate exemption documentation
- Proper nexus analysis
Compliance Challenges for Foreign Businesses
Non-U.S. businesses face unique issues in sales tax compliance in the USA:
- Understanding nexus without physical presence
- Navigating U.S. registration requirements
- Managing multi-state filings
- Currency conversion and reporting
- Coordinating with U.S. tax advisors
Foreign sellers are not exempt from Wayfair-based obligations.
Best Practices for Sales Tax Compliance
1. Conduct Regular Nexus Reviews
Monitor sales thresholds in each state quarterly or monthly.
2. Automate Tax Calculation
Use tax engines or ERP integrations to apply correct rates.
3. Maintain Documentation
Keep invoices, exemption certificates, and filings organised.
4. Seek Professional Advisory Support
Sales tax laws change frequently, and professional guidance reduces risk.
How Ease to Compliance Can Help
Ease to Compliance (E2C Assurance Pvt. Ltd.) provides end-to-end U.S. sales tax compliance services for domestic and international businesses, including:
- Nexus assessment and risk analysis
- State-wise sales tax registration
- Sales tax return preparation and filing
- Audit support and representation
- Cross-border tax advisory
Our team supports businesses across the USA, India, Europe, and other global markets, ensuring compliant and scalable growth. Contact Us Today!
Conclusion
The Wayfair ruling permanently reshaped sales tax compliance in the USA, making economic nexus a central compliance consideration for businesses of all sizes. Whether you are an e-commerce seller, SaaS provider, or foreign company entering the U.S. market, understanding nexus rules and maintaining proactive compliance is essential.
With state-specific thresholds, complex taxability rules, and heightened enforcement, sales tax compliance can no longer be treated as an afterthought. Partnering with experienced advisors ensures accuracy, reduces risk, and allows businesses to focus on growth.
FAQs – Sales Tax Compliance in the USA
1. Does sales tax nexus reset every year after Wayfair?
Answer: No. Economic nexus is generally evaluated annually, but once established, nexus often continues until the state’s formal deregistration criteria are met.
2. Are refunds and returned goods counted toward economic nexus thresholds?
Answer: In most states, gross sales are counted toward nexus thresholds, meaning refunds may still be included unless state guidance allows exclusions.
3. Can voluntary disclosure agreements (VDAs) reduce sales tax liabilities?
Answer: Yes. Many states offer VDAs that limit look-back periods and waive penalties for businesses that voluntarily come forward before an audit.
4. Is sales tax required on interstate B2B transactions?
Answer: Sales tax may still apply unless the buyer provides a valid resale or exemption certificate, even for interstate B2B sales.
5. How long must sales tax records be retained for audit purposes?
Answer: Most states require businesses to retain sales tax records for 4–7 years, depending on the statute of limitations and state law.
