How the Wayfair decision changed everything
For most of its history, sales tax followed a simple rule about who had to collect it: physical presence. A business with a store, an office, a warehouse, or employees in a state collected that state’s sales tax; a business without any of those did not. Mail-order, and then e-commerce, drove a truck through the gap. A catalog or online retailer could sell into a state with no physical footprint and owe nothing, while the local store down the street collected tax on every sale — a growing competitive distortion as commerce moved online.
In 2018 the Supreme Court closed the gap. South Dakota v. Wayfair overturned the physical-presence rule, holding that a state could require an out-of-state seller to collect sales tax based on economic activity alone — a sufficient volume of sales into the state, with no store, no inventory, and no employees required. But the decision did not create a single national rule. It set forty-six taxing jurisdictions loose to each define their own threshold, their own measurement period, and their own list of what is taxable. The result is not a system but a patchwork — and that patchwork, in which the obligation itself must be determined state by state before any computation begins, is the whole of this term’s offshore lesson.
What is sales tax?
Sales tax is a tax on retail sales, collected by the seller from the buyer and remitted to the state. A business owes it in any state where it has nexus — a connection created by physical presence or, since the 2018 Wayfair decision, by crossing that state’s economic sales threshold. Thresholds, taxable products, and rates all vary by state.
The defining feature is that sales tax inverts the usual order of tax compliance. In income tax, the obligation is given — you have income, so you owe — and the work is computing the amount. In sales tax, the obligation itself is the question: whether you must collect, in which states, and on which products are all determinations that come before any computation, and each is answered differently in each state.
How sales tax and economic nexus work in practice
The concept. Sales tax is a transaction tax on retail sales. The seller collects it from the buyer at the point of sale and remits it to the state. Forty-five states and DC impose one.
Nexus — the connection that creates the obligation.
- Physical nexus — an office, employees, inventory in a fulfillment center, even a trade-show booth — creates an obligation from the first dollar.
- Economic nexus — established by Wayfair — arises from sales volume alone, once the business crosses the state’s threshold.
The thresholds and the patchwork. The original South Dakota template was $100,000 in sales or 200 transactions. Most states landed near $100,000; California and New York set it at $500,000. But the details diverge sharply: many states have dropped the 200-transaction prong (it caught tiny high-volume sellers — 200 sales at $5 is $1,000), so only roughly 18 states still use it. New York requires both $500,000 and 100 transactions, while New Jersey uses either $100,000 or 200. Measurement periods differ (a rolling 12 months, or the prior calendar year), and what counts toward the threshold differs (gross versus taxable sales; whether marketplace and resale sales are included). The same revenue can create nexus in one state and not another.
Marketplace facilitators. All 45 states require platforms — Amazon, Etsy, eBay, Walmart — to collect and remit on the sales they facilitate. But a seller’s direct sales (its own website) remain its responsibility, marketplace sales often still count toward the nexus threshold, and many states still require a return.
Product taxability. What is taxable varies dramatically by state. Clothing, groceries, digital goods, and software can each be taxable in one state and exempt in another.
Compliance. Once nexus exists, the business registers, collects the correct combined state-and-local rate (there are thousands of local jurisdictions), and files returns. Nexus is not retroactive — collection begins from the point it is established.
Key rules and thresholds — verify at publish
| Rule / element | Current status | Notes |
|---|---|---|
| Physical nexus | Creates obligation from first dollar | Still applies alongside economic nexus — both can exist independently |
| Economic nexus — standard threshold | ~$100,000 in most states | California and New York: $500,000. Verify per state at publish |
| 200-transaction prong | Approximately 18 states still use it | Being dropped by many states — Utah July 2025, Illinois January 2026. Verify per state |
| Marketplace facilitator collection | Required in all 45 sales-tax states | Covers marketplace sales only; direct-channel sales remain seller responsibility |
| Product taxability | Varies by state and product type | Clothing, food, digital goods, SaaS each treated differently by state |
| Nexus retroactivity | Not retroactive | Collection obligation begins when threshold is crossed, not from earlier sales |
⚠️ PUBLISH-VERIFY: Thresholds, transaction prong status, and product taxability rules are actively changing. Confirm per-state rules against current state guidance before publishing this page.
Where sales tax exposure is highest
| Industry / context | Why sales tax matters here |
|---|---|
| E-commerce & online retail | The Wayfair epicenter — selling nationwide can create nexus in many states at once |
| SaaS & digital products | Taxability is a minefield, differing in every state and actively evolving |
| Marketplace sellers | Facilitator collection overlaps with direct-sale obligations — not a complete solution |
| Multi-channel retail | Physical and online sales create both kinds of nexus simultaneously |
| Subscription & streaming | Increasingly taxed as states expand digital services taxation |
| Pure service businesses | Often less exposed, since many services are untaxed — but product taxability rules vary |
How sales tax is handled in software
- Sales-tax automation (Avalara, TaxJar). These tools compute combined state-and-local rates, file returns, and manage exemption certificates — but only after nexus and product taxability have been configured. The tools apply rules; they do not determine whether the business has crossed a particular state’s threshold under that state’s specific definition, or how a novel product is taxed in each state. The computation is automatable; the obligation map is a determination that precedes it.
- QuickBooks Online / Xero. Provide the sales-by-state and by-product data that feeds both the nexus analysis and the rate computation. Sales reporting by location is the starting point for any nexus review.
- Commerce platforms (Shopify, WooCommerce, etc.). Supply transaction-level detail at the product and jurisdiction level, feeding both the data map and the automated rate lookup.
How CPA firms handle sales tax
For a CPA or EA firm, sales tax work is a determination of obligation across a patchwork, followed by compliance. The core work is the nexus study — determining where the business has physical or economic nexus, state by state, against each state’s threshold, period, and inclusion rules. This requires knowing not just the sales volume but how each state counts the sales, what the measurement period is, and whether the products are taxable there at all.
Beyond nexus determination, the firm handles product taxability characterization (how each product or service is treated in each registered state), registration and voluntary disclosure for past exposure, and compliance setup — configuring the automation, managing marketplace overlap, and filing. The split: tracking the data and computing the tax are execution; the nexus determination, the taxability characterization, and the exposure positions are the firm’s.
Sales tax and offshore accounting
Sales tax closes the tax cluster by inverting it. Every income-tax term before it took the obligation as given — there is income, so there is a tax — and located the difficulty in the computation. Sales tax moves the entire difficulty upstream, into the obligation itself. The hard questions are not how much but whether, where, and on what: whether the business must collect at all, in which of forty-six jurisdictions, and on which of its products. Only once those are answered does any computation begin — and the computation itself is the automatable, straightforward part.
What makes the determination genuinely hard, and genuinely the firm’s, is that there is no single rule to apply. There are forty-six. A state’s threshold might be $100,000 or $500,000; it might count transactions or have dropped that test; it might require either prong or both; it might measure a rolling year or a calendar year; it might count marketplace and exempt and resale sales toward the threshold, or exclude them. And whether a given product is taxable — clothing, software, a digital subscription — is answered differently in every state. Every state is its own determination.
The offshore team sits in a specific and valuable position relative to all this, and a specific danger. Its strength is exactly the raw material the determination needs: assembling sales broken out by state and by product across many jurisdictions is precisely the kind of disciplined, multi-jurisdiction tracking the offshore team does best, and the firm cannot make a nexus determination without that map. But the danger is to mistake the map for the conclusion. The characteristic failure mode is reading the sales data as the nexus obligation — seeing $120,000 of sales into a state and concluding “we have nexus, collect tax,” or seeing $80,000 and concluding “no nexus, we are clear.” Both overreach, because whether that volume creates an obligation depends on the state’s specific threshold, its measurement period, whether those particular sales even count toward it, and whether the product is taxable there. The data shows where the business sold; it does not show where it owes.
The discipline follows that line precisely. The offshore team builds the data map — sales by state, by product, by channel — and runs the computation once the obligations are set, configuring and operating the automation, separating marketplace-collected from direct sales, maintaining exemption certificates, and filing the returns. What it must not do is conclude nexus from the data, or assume one state’s rule applies to another, or treat a product’s taxability as settled across states. It surfaces the map and flags the approach: “sales into these three states are nearing what appear to be their thresholds — these need a nexus determination,” or “this product’s taxability differs by state and should be confirmed for each where we are registered.” The nexus determination, the per-state application of thresholds and periods and inclusion rules, and the product-taxability characterization are the firm’s. The map is the offshore team’s; the reading of the map against forty-six rulebooks is the firm’s.
What are the common misconceptions about sales tax?
- “If I do not have a store or office in a state, I do not owe its sales tax.” Not since 2018. Under economic nexus, enough sales into a state creates an obligation with no physical presence at all.
- “There is one sales-tax threshold — $100,000 or 200 transactions.” That was one state’s original rule. Every state sets its own threshold, measurement period, and inclusion rules, and many have dropped the transaction prong. The same sales can create nexus in one state and not another.
- “If Amazon collects the tax, I am covered.” Only for your marketplace sales. Your direct sales remain your responsibility, marketplace sales often still count toward your nexus threshold, and many states still require you to file a return.
- “Sales tax applies to everything I sell.” No. Product taxability varies dramatically by state. Clothing, groceries, digital goods, and software can each be taxable in one state and exempt in another.
- “My sales data tells me where I owe tax.” The data tells you where and how much you sold. Whether that creates an obligation is a separate determination against each state’s specific threshold, period, and taxability rules.
What terms are commonly confused with sales tax?
| Confused with | The key difference |
|---|---|
| Income tax | A tax on profit. Sales tax is a transaction tax on each sale, collected from the customer, owed regardless of whether the business is profitable |
| Nexus | The connection that creates the obligation to collect — a precondition for sales tax, not the tax itself |
| Use tax | The buyer-side complement, owed by the purchaser when sales tax was not collected at the point of sale |
| Marketplace facilitator | The platform that collects on marketplace sales; does not cover a seller’s direct-channel sales |
| Exemption certificate | Documentation that a particular sale is exempt (resale, nonprofit), not the tax itself |
Common client questions about sales tax
Do I have to collect sales tax in states where I have no presence?
Potentially yes, since 2018. If your sales into a state cross its economic threshold, you have to register and collect there even with no office, inventory, or employees in the state. The threshold and rules differ by state, so it has to be checked state by state — there is no single national rule that settles it.
How do I know where I owe sales tax?
It takes a nexus review. We look at where you have physical presence, which creates an obligation immediately, and your sales into each state, which can create one once you cross that state’s threshold. But the thresholds, the periods they are measured over, and even which sales count all vary, so it is a state-by-state determination. We assemble the sales picture; the firm applies each state’s rules to it.
Your team tracks my sales — can you just tell me where I have nexus?
We can build the picture you need — your sales broken out by state and product, which is exactly the data the determination rests on. But whether those sales create nexus in a given state is a legal determination the firm makes, because it depends on that state’s specific threshold, how it measures the period, which sales it counts, and how it taxes your particular product. The data shows where you sold; the firm determines where you owe. We keep that map accurate and flag the states approaching a threshold, rather than concluding nexus from the numbers ourselves.
Amazon collects sales tax for me — am I done?
For your Amazon sales, largely yes — marketplace platforms collect and remit on the sales they facilitate. But if you also sell through your own website, those direct sales are still your responsibility, your marketplace sales often still count toward your nexus thresholds, and some states want a return from you even when the platform paid the tax. It is worth confirming rather than assuming the platform covers everything.
Is everything I sell taxable?
Not necessarily. What is taxable varies a lot by state — clothing, groceries, digital products, and software are treated differently from one state to the next, so the same item can be taxable in one place and exempt in another. Getting the product classification right in each state where you are registered is part of collecting the correct amount.
