Sales tax compliance is one of the most misunderstood and underestimated issues facing businesses today.
Failing to understand the concept of “Nexus”—a business’s tax obligation based on its presence in a state—can lead to devastating financial consequences, including business closure and personal liability for owners. Nexus can be established through either physical or economic presence, and each state defines these differently. Physical Nexus, the traditional standard, involves tangible connections like offices, employees, or inventory in a state. For example, storing goods in an Amazon warehouse in another state can create Nexus, obligating a business to collect and remit sales tax there. Even attending a trade show can trigger Nexus, depending on the state. While many states have passed “marketplace facilitator” laws requiring platforms like Amazon to handle tax collection, these laws are relatively recent, and businesses may still be liable for taxes incurred before their enactment.
Economic Nexus, established by the 2018 Supreme Court decision in South Dakota v. Wayfair, allows states to require tax collection based on sales volume or transaction count, even without physical presence.
Each state sets its own thresholds, and businesses must determine whether their products or services are taxable in each jurisdiction. This complexity is compounded by varying definitions of taxable goods and services—what’s taxable in one state may not be in another. Non-compliance can result in audits, back taxes, interest, and penalties, with no statute of limitations if returns were never filed.
Moreover, unpaid sales tax is considered the customer’s money, not the business’s, and cannot be discharged in bankruptcy.
Business owners can be held personally liable, making it critical for companies to understand and comply with sales tax laws in every state where they operate. Ignorance of the law is not a defense, as illustrated by real cases where businesses faced crippling tax bills due to misunderstanding Nexus.