This guide is for e-commerce and SaaS businesses looking to understand and manage sales tax nexus using software solutions, helping you avoid costly penalties and support your growth. As you scale your e-commerce or SaaS business, hitting new revenue milestones and shipping to customers across the country, every sale into a new state could be quietly creating a tax obligation you don’t know about—unless you have sales tax software with nexus support.
For businesses expanding into new markets, unique compliance challenges arise, making it crucial to have solutions that support seamless integration and ongoing compliance. Sales tax nexus—the connection that triggers your responsibility to collect and remit state sales tax—has become one of the most common financial blind spots for growing online sellers. If you want a broader view of the finance risks and growth planning that come with scaling, explore our Fractional CFO Services for E-commerce Brands resources. This guide breaks down how nexus works, the types that affect e-commerce and SaaS businesses, how to determine where you have obligations, and what to do if you’ve fallen behind on compliance.
Sales tax software solutions often include features for nexus tracking and automate tax calculations, filings, and reporting to simplify compliance for businesses. As global tax compliance becomes increasingly important for e-commerce brands and SaaS companies selling internationally, comprehensive tax solutions are essential for managing obligations across multiple jurisdictions.
Sales tax software with nexus support helps streamline tax compliance by providing real-time monitoring of physical and economic activities that trigger sales tax obligations.
Leading Sales Tax Software Solutions With Nexus Support
Effective sales tax software for multi-state nexus includes leaders like Avalara, TaxJar, Sovos, Vertex, and Stripe Tax. These solutions help businesses monitor and manage their tax obligations across jurisdictions by providing real-time tracking of activities that trigger nexus, automating tax calculations, and simplifying filings and reporting.
Software | Nexus Tracking Features | Best For |
|---|---|---|
Avalara | Real-time nexus monitoring, automated alerts, detailed jurisdictional mapping | Large enterprises, multi-state sellers |
Learn about essential questions every business owner should ask a CFO advisor in addition to using TaxJar. | Economic and physical nexus tracking, threshold alerts, automated filings | E-commerce SMBs, Shopify, Amazon sellers |
Sovos | Comprehensive nexus management, global compliance, integration with ERP systems | Global businesses, complex tax scenarios |
Vertex | Advanced nexus analytics, customizable rules, integration with major ERP platforms | Enterprises, manufacturers, B2B |
Stripe Tax | Automated nexus tracking, real-time tax calculation, seamless Stripe integration | SaaS, digital goods, Stripe users |
Sales tax software with nexus support helps streamline tax compliance by providing real-time monitoring of physical and economic activities that trigger sales tax obligations.
What is Sales Tax Nexus
Sales tax nexus is the connection between your business and a state that triggers an obligation to collect and remit sales tax. When you have nexus in a state, that state can legally require you to charge sales tax to customers, register for a permit, and file regular returns. Without this connection, a state simply has no authority over your business when it comes to collecting its taxes.
For years, nexus was straightforward: if you had a physical presence in a state, like an office or warehouse, you had nexus there. That changed in 2018 with the Supreme Court’s decision in South Dakota v. Wayfair. The ruling allowed states to require tax collection based purely on economic activity—meaning sales revenue or transaction volume—even if you’ve never physically been in that state. U.S. sales tax laws have evolved significantly, now allowing states to enforce tax collection based on economic presence rather than just physical presence.
Today, nearly every state with a sales tax has adopted economic nexus rules. Sales and use tax obligations are determined by a complex set of tax rules that vary by state, making compliance challenging for businesses operating in multiple jurisdictions. So as your e-commerce or SaaS business grows and sells into more states, you’re likely creating new tax obligations without realizing it.
Sales tax software with nexus support helps businesses monitor and manage their tax obligations by providing real-time tracking of activities that trigger nexus.
Now that you understand what creates nexus, let’s explore the financial risks it poses for growing businesses.
The Hidden Financial Risks of Sales Tax Nexus for Scaling Businesses
For growing e-commerce and SaaS companies, sales tax nexus is one of the most overlooked financial risks. As you scale and sell into new markets, you often unknowingly trigger nexus in multiple states. Failing to monitor nexus can result in unexpected tax liability, which not only leads to costly back taxes and penalties but also disrupts your financial records and overall business health. This exposure tends to go unnoticed until it becomes expensive to fix.
Unexpected Back Tax Liabilities
States can assess back taxes for every period when you had nexus but failed to collect and remit sales tax. This liability builds up quietly while you’re focused on growth. Many business owners discover years of uncollected taxes all at once, and that kind of financial shock can threaten the company’s stability. Maintaining audit readiness—with organized transaction logs, automated audit trails, and traceable documentation—is crucial to avoid surprises during state reviews of your tax history.
Penalties and Interest That Compound Over Time
Beyond the back taxes themselves, states add penalties for late registration and filing, plus interest on unpaid amounts. The longer you remain non-compliant, the more these charges stack up. What might have been a manageable tax bill can turn into a serious financial burden.
Cash Flow Disruption from Sudden Collection Requirements
Discovering a nexus obligation means immediate, unplanned costs: state registration fees, sales tax software, and professional service fees. Integrating payment processing solutions that support tax collection can help businesses manage payments efficiently during compliance transitions. You also have to start collecting tax from customers right away. This sudden shift can throw off carefully planned cash flow forecasts—especially if you’re already wrestling with seasonal purchasing and stock levels (see our guide on the Q4 inventory cash flow trap for e-commerce brands for related cash crunch dynamics).
Due Diligence Red Flags That Delay or Kill Deals
When your business is being sold or seeking investment, buyers and investors examine sales tax compliance closely during due diligence. Unresolved nexus issues raise red flags that can lower your valuation, delay closing, or cause a deal to fall apart entirely. If you’re planning for an eventual sale, it also helps to understand how tax, margins, and operational maturity show up in outcomes—here’s a deeper look at e-commerce valuation and exit planning.
Engaging tax professionals early can help identify and resolve compliance issues before due diligence, ensuring a smoother transaction process.
With these risks in mind, let’s look at the different types of sales tax nexus that can affect your business.
Types of Sales Tax Nexus That Affect E-commerce and SaaS Sellers
E-commerce and SaaS businesses face four main types of nexus:
- Physical nexus: Created by having a tangible presence in a state
- Economic nexus: Created by exceeding a state’s sales revenue or transaction count threshold
- Click-through nexus: Created by referral agreements with in-state residents or businesses
- Affiliate and marketplace nexus: Created by relationships with third-party affiliates or sales on marketplace platforms
Each type of nexus may create obligations for multiple tax types, such as sales tax, VAT, excise, or lodging tax. Businesses must understand the specific tax types applicable in each jurisdiction to ensure compliance.
Physical Nexus
Physical nexus comes from having a tangible presence in a state. Obvious triggers include offices, employees, or warehouses. But less obvious activities can create physical nexus too—storing inventory in a third-party logistics warehouse, having a remote employee in a state, or attending a trade show. Even drop-shipping arrangements where a supplier holds inventory on your behalf can trigger physical nexus.
Economic Nexus
Economic nexus kicks in when you meet a state’s specific sales or transaction threshold, even without any physical presence. Since the Wayfair decision, economic nexus has become the most common way e-commerce and SaaS businesses trigger collection obligations. Each state sets its own thresholds, which vary quite a bit.
Click-through Nexus
Some states impose click-through nexus when an out-of-state business generates sales from referrals by in-state residents. This typically applies when you pay commissions to affiliates who send customers to your website through links.
Affiliate and Marketplace Nexus
Affiliate nexus comes from relationships with in-state individuals or businesses that help establish a market for your products. This is different from marketplace facilitator laws, where platforms like Amazon or Etsy collect and remit sales tax on behalf of third-party sellers in most states.
Understanding these types of nexus is essential for identifying where your business may have tax obligations. Next, let’s review how economic nexus thresholds vary by state.
Economic Nexus Thresholds by State
Each state sets its own threshold for economic nexus, usually based on annual sales revenue or transaction count. These thresholds vary significantly from state to state.
State | Sales Threshold | Transaction Threshold | Notes |
|---|---|---|---|
California | $500,000 | None | Origin-based for in-state sellers |
$500,000 | None | Destination-based | |
$100,000 | None | Recently enacted | |
Illinois | $100,000 | For businesses processing 200 transactions, understanding the CFO Salary Guide 2025: Industry Compensation Breakdown can help determine appropriate compensation structures for financial oversight. | Meeting either threshold triggers nexus |
Using accurate tax rates is essential for determining compliance and avoiding under- or over-collection, as even small discrepancies can lead to audit issues or financial penalties.
Tip: State laws change frequently. Always verify current thresholds directly with the state’s department of revenue or a qualified tax professional.
Now that you know the thresholds, let’s walk through how to determine where your business has sales tax nexus.
How to Determine Where Your Business Has Sales Tax Nexus
Figuring out your nexus exposure takes a systematic approach. Leveraging transaction data and tax data from your systems is essential to accurately assess where you may have sales tax obligations. Here’s a step-by-step process to get a clear picture of where you have obligations.
As your nexus footprint evolves, be sure to regularly review and update tax settings in your platforms to maintain ongoing compliance.
Step 1: Audit Your Sales by State
Start by running a report from your e-commerce platform or accounting system that shows total sales revenue and transaction counts by destination state. This helps you spot which states have meaningful sales volume and are approaching economic nexus thresholds.
Step 2: Identify Physical Presence Triggers
Review your business operations for activities that could create physical nexus. Look at:
- Locations of all employees, including remote workers and contractors
- Addresses of offices, warehouses, or other physical locations
- Inventory locations, including 3PL and Amazon FBA warehouses
- States where you attend trade shows or conduct sales meetings
Step 3: Compare Revenue Against State Thresholds
Take your sales data and compare it against each state’s economic nexus threshold. Track both trailing twelve-month and calendar-year figures, since states use different measurement periods to determine when you’ve crossed the line.
Step 4: Review Marketplace and Affiliate Relationships
Review all third-party relationships, including affiliate marketing programs and referral partners. Even if a marketplace collects tax on your behalf, those sales may still count toward your economic nexus threshold for direct sales through your own website.
With your nexus exposure mapped out, let’s see how marketplaces affect your obligations.
How Marketplaces Affect Your Nexus Obligations
Marketplace facilitator laws have created a lot of confusion for sellers. Understanding the difference between what the marketplace handles and what falls on you is critical.
Solutions like Stripe Tax can automate tax calculation and compliance for businesses using Stripe for payment processing.
Marketplaces often support multiple payment methods, which can further complicate tax compliance for sellers.
Amazon and Marketplace Facilitator Laws
In most states, marketplace facilitator laws require platforms like Amazon, Etsy, and Walmart to collect and remit sales tax on behalf of third-party sellers. However, this doesn’t mean you’re completely off the hook. Some states still require you to register for a permit and file returns, even if you’re reporting zero tax collected.
Shopify and Direct Sales Platforms
Platforms like Shopify and BigCommerce work differently—they’re e-commerce platforms that give you tools to sell directly to consumers, not marketplace facilitators. Configuring your billing system correctly is essential for accurate tax collection and remittance. If you sell through your own Shopify store, you’re fully responsible for determining nexus, registering for permits, configuring tax collection, and remitting taxes to the states.
Multi-channel Sellers and Overlapping Obligations
Businesses selling through both marketplaces and their own websites face the most complexity. Here’s the tricky part: sales made on a marketplace, even though the marketplace remits the tax, often still count toward a state’s economic nexus threshold. So your Amazon sales could trigger a nexus obligation for your Shopify sales in that same state.
Multi-channel selling frequently results in complex tax scenarios that require careful management and specialized sales tax software with nexus support.
Next, let’s discuss how to manage exemption certificates for compliant sales tax management.
Exemption Certificate Management for E-commerce and SaaS Sellers
Exemption certificate management is a vital component of sales tax compliance for e-commerce and SaaS businesses. When customers claim tax-exempt status—such as resellers, non-profits, or government entities—they must provide a valid exemption certificate. Properly collecting, validating, and storing these certificates is essential to comply with sales tax laws and avoid costly audit risks.
Manual exemption certificate management can quickly become an administrative burden, especially as your customer base grows and you sell into more states. Missing or invalid certificates are a common trigger for sales tax audits, and states may assess back taxes and penalties if your documentation is incomplete.
To streamline this process, many e-commerce and SaaS sellers turn to sales tax compliance software like TaxJar or Avalara, which offer built-in exemption certificate management tools. These solutions automate the collection and validation of certificates, securely store digital copies, and alert you when renewals are needed. By leveraging these tools, you can reduce manual errors, minimize audit exposure, and focus on scaling your business—confident that your exemption certificate management is audit-ready and fully compliant with evolving sales tax laws.
With exemption management in place, let’s look at how to handle local sales tax rates.
Local Sales Tax Rates: Navigating City and County Variations
Navigating local sales tax rates is one of the most challenging aspects of sales tax compliance for e-commerce and SaaS businesses. While state-level sales tax rates are well-publicized, many cities and counties impose their own additional sales taxes, creating a patchwork of tax rates and rules that can change frequently.
Accurate tax calculation at the local level is critical to ensure compliance with sales tax laws and avoid under- or over-collecting tax from your customers. Relying on manual lookups or outdated rate tables can lead to costly mistakes and increased audit risk.
Sales tax compliance software provides a powerful solution by giving businesses access to up-to-date tax rate databases and automated tax calculation tools. These platforms automatically determine the correct local sales tax rates for each transaction based on the customer’s shipping address, ensuring accurate and compliant sales tax management across all jurisdictions. By integrating these tools into your sales and billing systems, you can simplify your tax workflow, reduce administrative burden, and maintain compliance with both state and local sales tax regulations.
Now, let’s see what happens if you ignore sales tax compliance altogether.
What Happens When You Ignore Sales Tax Compliance
Ignoring sales tax obligations doesn’t make them go away. It only increases the eventual cost and disruption when the issue surfaces.
Tax authorities actively monitor and enforce compliance with sales and use tax laws, increasing the risk of penalties and audits for businesses that fail to meet their obligations.
State Audits and Back Tax Assessments
States actively audit e-commerce and SaaS businesses using data from payment processors, shipping carriers, and marketplaces. An audit typically involves a state requesting years of sales records, which can lead to assessments for back taxes, penalties, and interest going back several years. Maintaining accurate tax reporting is essential to minimize risk during audits.
Penalties That Exceed the Original Tax Owed
Penalties for non-compliance can be steep, especially if a state determines the failure was willful. Some states impose fraud penalties that are significantly higher than standard late-payment penalties—sometimes exceeding the original tax amount itself.
Reputational and Operational Disruption
An audit consumes significant management time and attention, pulling focus away from growing the business. If a state places a tax lien on your business, it becomes a public record that can damage relationships with suppliers, lenders, and customers.
If you’ve fallen behind, here’s how to manage past non-compliance.
How to Manage Past Non-compliance
If you’ve discovered historical sales tax exposure, there’s a clear path forward to get compliant while minimizing penalties.
Managed services can help businesses catch up on compliance by outsourcing tax filing processes to experts, and streamline tax returns preparation through automation and integration with ERP systems.
Voluntary Disclosure Agreements Explained
A Voluntary Disclosure Agreement, or VDA, is a formal process offered by most states that allows you to proactively report past-due sales tax. In exchange for coming forward voluntarily, states typically waive penalties and limit the “look-back” period to three or four years, regardless of how long you were actually non-compliant.
When to Self-report vs. Wait
Self-reporting proactively is almost always the better approach. It lets you control the process, limit your financial exposure, and demonstrate good faith to the state. Waiting is risky—if the state discovers you first, you’ll face a full audit with no penalty relief and an unlimited look-back period.
Working with Professionals to Minimize Exposure
Navigating historical non-compliance is complex, and it’s best handled with expert help. Specialized tax expertise is often required to navigate complex remediation processes. A specialized tax professional or strategic finance partner can accurately assess your exposure, negotiate VDAs on your behalf, and structure a remediation plan before the issue becomes a crisis. Working with tax experts ensures a smooth and compliant resolution, reducing risk and providing peace of mind.
Once you’re caught up, it’s time to build a sustainable compliance process.
How to Build a Sales Tax Compliance Process
Once you’ve addressed past issues, building a sustainable compliance process keeps you on track as you continue to grow. Choosing tax compliance solutions that offer automatic tax calculations and support comprehensive sales across multiple jurisdictions is essential for minimizing risk and ensuring accuracy.
Robust tax solutions can streamline compliance and reporting as your business grows.
Step 1: Register for Sales Tax Permits
Before collecting any sales tax, register for a permit in each state where you have nexus. Collecting tax without a permit is illegal in most states.
Step 2: Configure Tax Collection
Configure your e-commerce platforms to collect sales tax at the correct rates. Configuring your platform for automated filing and accurate sales tax filings is essential for ongoing compliance, as it ensures that your business can automatically submit and remit tax returns to government authorities without manual intervention. Most modern platforms integrate with sales tax automation tools that handle real-time rate calculations across thousands of jurisdictions.
Step 3: Classify Products and Apply Exemptions Correctly
Not all products are taxed the same way in every state. Effective exemption management and tracking tax exemptions are critical for compliance, as businesses must accurately manage exemption certificates and ensure proper documentation across jurisdictions. Digital goods, SaaS, clothing, and food often have unique taxability rules or exemptions. Incorrect classification is a common source of audit risk.
Step 4: Automate Filing and Remittance
Use sales tax automation software like TaxJar, Avalara, or Anrok to prepare and file returns automatically. Automating sales tax returns and tax filing reduces manual effort and minimizes errors, ensuring accurate tax returns preparation and submission across multiple jurisdictions. Automation reduces errors and frees your team for higher-value work.
Step 5: Monitor Thresholds Monthly
Sales tax compliance isn’t a one-time project. Monitor sales by state on a monthly basis to track your progress toward triggering nexus in new states, and stay current on changes to state laws and thresholds.
For more complex businesses, integration with major ERP systems such as SAP, Oracle, or Microsoft Dynamics may be necessary to effectively monitor and manage nexus thresholds.
With a process in place, let’s look at the tools and best practices for automating sales tax compliance.
Sales Tax Automation: Tools and Best Practices
Sales tax automation is essential for businesses looking to streamline their sales tax management and maintain compliance with complex tax laws. Automating sales tax calculations, filings, and reporting not only reduces the risk of human error but also frees up valuable time and resources for your team.
Leading sales tax automation tools, such as Sovos and Vertex, offer comprehensive solutions that handle real-time tax calculations, generate accurate tax returns, and enable electronic filing across multiple jurisdictions. These platforms often include features for exemption certificate management, audit-ready reporting, and seamless integration with your existing accounting, ERP, or e-commerce systems.
Best practices for implementing sales tax automation include selecting a robust tax engine that supports your business’s specific needs, regularly updating tax rates and rules, and ensuring your system is configured for all relevant product and service taxability scenarios. Additionally, maintaining digital records and leveraging advanced reporting capabilities can help you stay audit-ready and identify potential compliance gaps before they become issues.
By adopting sales tax automation and following these best practices, businesses can achieve significant savings in both time and money, reduce audit risk, and ensure ongoing compliance with ever-changing sales tax laws.
Next, let’s address the unique challenges SaaS companies face with sales tax nexus.
SaaS Companies and Sales Tax Nexus
SaaS companies face unique challenges when it comes to sales tax nexus and compliance. As software businesses expand their customer base across state and international borders, they must navigate a complex web of sales tax laws that often treat digital products and services differently from tangible goods.
Determining where your SaaS company has sales tax nexus is the first step toward compliance. This involves analyzing your sales data, customer locations, and business activities to identify jurisdictions where you are required to collect and remit sales tax. With economic nexus rules now in effect in most states, even a modest volume of sales can trigger tax obligations in multiple locations.
Sales tax compliance software, such as Anrok and Fonoa, is specifically designed to help SaaS companies manage these complexities. These platforms automate tax calculation for digital products, manage exemption certificates, and facilitate electronic filing in every jurisdiction where you have nexus. By leveraging these tools, SaaS companies can ensure accurate tax determination, reduce the risk of costly errors, and maintain compliance with evolving sales tax regulations—allowing finance professionals and business leaders to focus on growth and innovation rather than tax headaches.
Understanding the impact of compliance on your business’s value is also critical.
How Sales Tax Compliance Affects Your Business Valuation
Strong sales tax compliance connects directly to your company’s enterprise value and exit readiness. For potential buyers and investors, clean sales tax records signal operational maturity and a well-run business.
Maintaining accurate sales records is essential for both compliance and maximizing business valuation.
On the flip side, unresolved liabilities discovered during due diligence can reduce your net proceeds through purchase price reductions or escrow holdbacks. Viewing compliance and financial strategy as an investment in your company’s future options—rather than just a cost of doing business—is key to maximizing value when it’s time to sell.
A strategic finance partner can help you stay on top of compliance and protect your business’s value.
How a Strategic Finance Partner Helps You Stay Compliant
A strategic finance partner or fractional CFO acts as a navigator for your growing business, helping you chart the course while watching for obstacles like sales tax nexus. They integrate compliance monitoring into your overall financial picture, spotting when you’re approaching thresholds and building compliance costs into cash flow forecasts. A strategic finance partner tailors solutions to your unique business needs, ensuring that your sales tax software with nexus support aligns with your operational goals and growth plans.
This kind of proactive oversight lets you focus on growth, confident that your financial foundation is solid. To see how this approach can protect and grow your business, explore our outsourced CFO leadership
Ready to get ahead of nexus risk and protect your margins? Book a call with Bennett Financials
Remember, proactive compliance is just the beginning of building a resilient financial foundation.
