For many businesses, sales and use tax compliance has become significantly more complicated following the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair, Inc. in 2018. Prior to Wayfair, states were prohibited from requiring a business to collect sales tax unless the business maintained a physical presence within the state. Wayfair changed that framework by permitting states to impose sales tax collection obligations based solely on a business’s economic activity within the state.
Following Wayfair, states have aggressively expanded enforcement efforts, adopted varying economic nexus standards, and increased audit activity. Businesses that sell products or services across state lines may face significant sales tax exposure even if they have no employees or property in a particular state. As a result, sales tax audits have become one of the fastest-growing areas of state tax controversy.
The Post-Wayfair Landscape
Although Wayfair upheld South Dakota’s economic nexus regime, it did not create a uniform national standard. Instead, each state has developed its own thresholds, definitions, and administrative rules.
Today, most states impose economic nexus standards based on one or more of the following:
- Annual sales revenue into the state
- Number of transactions with customers in the state
- Marketplace sales activity
- Remote employee presence
- Affiliate or related-party relationships
As a result, businesses may have collection obligations in dozens of states without realizing it. Additionally, frequent legislative changes, differing filing requirements, and inconsistent interpretations among taxing authorities compound the sales tax compliance complexity.
Following is a summary of the key sales tax compliance risks that companies with multi-state sales face.
Risk #1: Unrecognized Economic Nexus
The most common issue arising in post-Wayfair audits is a business’s failure to recognize that it has established economic nexus.
Many businesses continue to associate tax obligations with physical locations. But a company may trigger filing and collection responsibilities solely through remote sales activity.
Common examples include:
- E-commerce retailers shipping products nationwide
- Software and SaaS providers with customers in multiple states
- Manufacturers making direct sales into states where they have no facilities
- Professional service providers with recurring customer relationships across state lines
Because economic nexus standards vary by jurisdiction, businesses often exceed thresholds without realizing it.
Risk #2: Historical Exposure
One of the most significant concerns in a sales tax audit is the potential for historical liability.
Unlike income taxes, sales taxes are generally considered trust fund taxes. When a business fails to collect tax from customers, the liability often becomes the business’s responsibility.
As a result, assessments may include:
- Uncollected sales tax
- Interest
- Penalties
- Additional compliance costs
Additionally, these trust fund liabilities (tax, plus associated interest, penalties and other costs) are often assessable against any individual responsible party of a company (often a company owner, President, CEO, CFO, manager, or other officer or executive) under applicable state law.
For businesses that have operated across state lines for several years (and their responsible parties), exposure can become substantial.
Risk #3: Marketplace Facilitator Confusion
Marketplace facilitator laws have introduced additional complexity.
Many businesses assume that because a marketplace platform collects and remits tax on certain transactions, all sales tax obligations have been satisfied. However, marketplace rules differ among jurisdictions and often require careful analysis.
Issues frequently arise when businesses:
- Sell through multiple channels
- Maintain direct sales alongside marketplace sales
- Misclassify transactions
- Fail to retain appropriate documentation
Auditors increasingly examine marketplace data when evaluating compliance.
Risk #4: Product & Service Taxability Issues
Even when a business properly registers and collects sales tax, disputes often arise regarding whether specific products or services are taxable.
Taxability rules vary dramatically among states, meaning a product or service that is taxable in one state may be exempt in another.
Examples include:
- Digital products
- SaaS offerings
- Information services
- Installation services
- Maintenance agreements
- Bundled transactions
As states continue expanding taxation of digital commerce, and as the wave of Artificial Intelligence (or, AI) products and services continues to grow, these disputes are becoming both more common and more complex.
Risk #5: Exemption Documentation Deficiencies
Businesses frequently rely on customer exemption certificates to support non-taxable transactions.
Unfortunately, auditors often discover:
- Missing certificates
- Expired certificates
- Incomplete documentation
- Improperly executed forms
In many states, the absence of proper documentation can result in the transaction being treated as taxable, even if the customer otherwise qualified for an exemption. Because of this, exemption certificate management remains one of the most important areas of audit preparation.
Risk #6: Information Sharing Among States
State taxing authorities have become increasingly sophisticated in identifying noncompliant businesses. Again, the rise of AI is fueling new capabilities in state taxing authority audit and enforcement activity, including information sharing.
Many states now share information obtained through:
- Federal tax filings
- Marketplace platforms
- Business registrations
- Industry-specific reporting programs
- Multi-state audit initiatives
As a result, a business audited in one state may subsequently attract attention from other jurisdictions. A single audit can therefore lead to broader multi-state exposure.
Preparing for a Sales Tax Audit
Businesses operating across state lines should consider periodically reviewing their sales tax compliance profile.
Areas worth evaluating include:
- Nexus footprint
- Registration status
- Product taxability determinations
- Exemption certificate procedures
- Marketplace sales reporting
- Historical exposure
Proactive reviews often identify issues before they become audit assessments. And, where exposure exists, voluntary disclosure agreements or other remediation strategies may provide opportunities to reduce penalties and limit lookback periods.
Final Thoughts
Wayfair fundamentally reshaped state sales tax compliance and enforcement. What was once a relatively narrow compliance issue has become a significant area of risk for businesses of all sizes.
As states continue refining economic nexus standards and expanding audit activity, businesses should ensure that their sales tax compliance processes keep pace with evolving requirements.
A sales tax audit today often involves far more than simply reviewing invoices and tax returns. It may require detailed analysis of nexus, taxability, exemption documentation, marketplace rules, and multi-state exposure.
Businesses that understand these risks and address them proactively are generally better positioned to manage audits and avoid unexpected assessments.
Nick’s Related Resources
About the Author
Nick Eusanio is a Tax Planning & Compliance Partner at DBL Law who advises businesses and individuals on federal, state, local, and international tax matters, including tax audits, administrative disputes, and complex tax controversies.
