Sales Tax Compliance for Online Sellers After South Dakota v. Wayfair

For decades, the rule governing US sales tax was relatively straightforward for online sellers: you only had to collect and remit sales tax in states where you had a physical presence — a store, a warehouse, employees, or other tangible connection to the state. That rule, established by the Supreme Court in 1992’s Quill Corp. v. North Dakota, effectively exempted most online and mail-order sellers from sales tax obligations in states where they had no physical presence. In June 2018, the Supreme Court overruled Quill in South Dakota v. Wayfair, Inc., and nothing about sales tax has been the same since.

What Wayfair Changed

In Wayfair, the Supreme Court upheld South Dakota’s economic nexus law, which required out-of-state sellers to collect and remit sales tax if they exceeded $100,000 in annual sales into South Dakota or 200 separate transactions with South Dakota customers — regardless of whether they had any physical presence in the state. The Court held that requiring physical presence as the sole basis for sales tax nexus was ‘unsound and incorrect’ in the modern economy, and that states could constitutionally impose collection obligations on sellers based on economic activity alone.

Within months of the Wayfair decision, nearly every state with a sales tax enacted its own economic nexus law. Today, 45 states plus the District of Columbia impose sales tax. Of those, all have economic nexus provisions that can require an out-of-state seller to collect and remit tax based on sales volume or transaction count alone, without any physical presence in the state.

Understanding Nexus

Nexus is the legal connection between a business and a taxing jurisdiction that creates a sales tax collection obligation. There are two types: physical nexus and economic nexus. Physical nexus arises from a tangible presence in the state — a store, office, warehouse, employee, or inventory stored at a fulfillment center (including Amazon FBA warehouses). Economic nexus arises from meeting a state’s sales or transaction threshold, typically $100,000 in annual sales or 200 transactions, though thresholds vary.

Businesses may also have nexus in a state through affiliate nexus (relationships with in-state affiliates who refer customers), click-through nexus (relationships with in-state website operators who receive commissions for referrals), marketplace facilitator rules, or through trade show presence. Every business selling across state lines needs to analyze its nexus profile in each state.

Marketplace Facilitator Laws

One of the most significant post-Wayfair developments is the rise of marketplace facilitator laws, which now exist in virtually every sales tax state. Under these laws, marketplace platforms — Amazon, eBay, Etsy, Walmart Marketplace, and others — are required to collect and remit sales tax on behalf of third-party sellers for sales made through the marketplace. This means that many small businesses selling exclusively through marketplaces have their sales tax obligations handled by the platform, not by the seller directly. However, sellers who also sell through their own websites, or who sell in states where the marketplace facilitator rules have exclusions, may still have independent collection obligations.

Taxability of Products and Services

Whether a particular product or service is subject to sales tax varies dramatically by state. Tangible personal property is generally taxable, but each state exempts specific categories — groceries in many states, prescription drugs almost universally, farm equipment in agricultural states, and many others. Services are generally not taxable in most states, but an increasing number of states tax specified services (digital services, software as a service, repair services, and others). Software sold as a download is taxed differently than software sold on physical media. Cloud-based software subscriptions (SaaS) are taxed in some states and not in others.

Getting taxability wrong can be as costly as failing to register in a nexus state. A business that incorrectly charges sales tax on a non-taxable item faces consumer class action risk. A business that fails to charge tax on a taxable item may be assessed for the uncollected tax, penalties, and interest.

Registration and Remittance

Once a business has nexus in a state, it must register for a sales tax permit in that state, collect sales tax on taxable sales to customers in that state at the applicable rate (which may vary by county and city), file regular sales tax returns (monthly, quarterly, or annually depending on the volume of taxable sales), and remit collected tax to the state by the applicable due date. Filing frequency requirements vary by state and by the volume of taxable sales, and deadlines vary as well. Multi-state compliance requires tracking all of these varying requirements.

Voluntary Disclosure and Back Tax Exposure

Businesses that have nexus in states where they have not registered face potential liability for back taxes, penalties, and interest — often going back three to four years, or in some states longer. Most states offer voluntary disclosure programs that allow businesses to come into compliance on a going-forward basis and pay reduced back taxes and penalties in exchange for voluntary registration. A voluntary disclosure agreement typically limits the lookback period and waives penalties, making it a far more palatable path to compliance than waiting to be audited.

Compliance Tools

Manual sales tax compliance across dozens of states is impractical for most businesses. Sales tax automation software — platforms like Avalara, TaxJar, Vertex, and others — integrates with e-commerce platforms and accounting systems to calculate the correct tax rate for each transaction, file returns automatically, and manage nexus tracking. The cost of these platforms is typically modest relative to the compliance burden they eliminate and the penalty exposure they help avoid.

The Bottom Line

The post-Wayfair sales tax landscape requires every business selling goods or taxable services across state lines to analyze its nexus profile, register in states where it has nexus, and build a sustainable compliance program. The businesses most at risk are online sellers who have been operating since before Wayfair and have never revisited their sales tax obligations. The good news is that voluntary disclosure programs, marketplace facilitator rules, and sales tax automation software make compliance more manageable than it once was — but taking action requires making it a priority.