By Prager Metis
The landscape of sales tax compliance has fundamentally shifted since the 2018 South Dakota v. Wayfair Supreme Court decision. What once required physical presence in a state to trigger tax obligations now extends to businesses with significant economic activity, creating new challenges for companies operating across state lines.
Understanding Physical vs. Economic Nexus
Traditional physical nexus remains straightforward—having offices, warehouses, employees, or even attending trade shows in a state typically establishes tax obligations. However, the Wayfair decision introduced economic nexus, which focuses on sales volume and transaction counts rather than physical presence.
Most states now require businesses to collect and remit sales tax once they exceed $100,000 in annual sales or 200 transactions within the state. Notable exceptions include California, New York, and Texas, which set higher thresholds at $500,000. Delaware, Montana, New Hampshire, and Oregon don’t impose state sales tax.
Critical Compliance Steps
Businesses must conduct nexus studies to identify where they owe taxes. This involves analyzing sales data by state, tracking transaction volumes, and maintaining detailed records. Proper accounting requires treating collected sales tax as a liability, not revenue, with accurate journal entries and regular reconciliation.
International Considerations
Foreign companies face additional complexities, including entity registration challenges, currency conversion requirements, and distinguishing between VAT and sales tax obligations. Despite lacking physical U.S. presence, international businesses may still owe state taxes based on their American customer base.
Technology and Professional Support
Modern businesses benefit from automated tax software integrated with ERP systems, but technology alone isn’t sufficient. Professional tax advisors help navigate varying state requirements, conduct compliance audits, and develop ongoing monitoring systems.
Proactive compliance prevents costly penalties and protects business reputation. Companies should establish regular assessment schedules, maintain comprehensive documentation, and stay current with evolving state tax laws to ensure long-term success.