State Nexus Checklist for Digital Service Providers

Why a checklist matters

Digital services — SaaS, digital advertising, streaming, online courses, hosting, and subscription platforms — can reach customers in every U.S. state without a storefront. Since the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018), states can impose sales tax and other obligations based on economic activity rather than only on physical presence. That change means digital providers must be intentional about identifying nexus and acting quickly to register, collect, and file taxes where required (South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)).

Use this checklist to translate legal concepts into daily operational tasks. Following it reduces the likelihood of penalties, interest, and surprise audits from state revenue departments.

State Nexus Checklist (step-by-step)

Below is an actionable checklist you can use each quarter or whenever your business model changes.

1. Map where customers and users are located

• Produce a rolling 12-month report showing revenue and transaction counts by state.
• Include marketplace and referral sales separately; many states treat marketplace-facilitated sales differently.
• Action: Export the report to CSV and save a dated copy for your records.

1. Compare results to state economic thresholds

• Many states use thresholds (commonly $100,000 in sales or 200 transactions in a 12‑month period), but thresholds vary. Check each state’s current rule on its Department of Revenue website before acting.
• Action: Flag states where you meet or exceed that state’s threshold.

1. Review physical presence triggers

• Check for offices, warehouses, inventory, trade shows, bundled services, or even temporary physical activity (e.g., on-site installations) that may create nexus.
• Include equity owners, boards, or officers who travel regularly to a state.

1. Audit workforce, contractors, and remote hires

• Employees and long-term contractors working in a state can create payroll and business nexus. Track days worked in each state and maintain signed remote-work agreements.
• Action: Maintain a roster of remote staff locations and export monthly summaries.

1. Evaluate affiliate and agent relationships

• Sales through affiliates, referral partners, or persons who advertise or facilitate sales can trigger affiliate nexus in some states. That includes referral links, commissions, and reseller relationships.

1. Check marketplace facilitator rules

• If you sell through platforms (e.g., app stores, SaaS marketplaces), verify whether the marketplace is responsible for collecting and remitting sales tax in each state. If not, you may be responsible.

1. Inventory digital product taxability

• States differ on whether a particular digital item (streaming, software access, downloads, templates, online courses) is taxable. Document how each state treats your product lines.

1. Determine income/franchise tax exposure and apportionment

• Nexus can also create filing obligations for state income or franchise taxes. Review apportionment formulas (single sales factor vs. double/triple factor) that affect taxable income allocation.

1. Register where required, then comply

• Register for sales tax and other state accounts before remitting. When in doubt, register promptly — late voluntary registrations can reduce enforcement risk, especially if you use a voluntary disclosure program (see below).

1. Collect, remit, and file on schedule

• Set up tax codes in your billing system. Verify taxability and exemption handling. Keep templates for state returns and due dates.

1. Keep documentation and retention policies

• Save customer invoices, exemption certificates, nexus analyses, and state correspondence for at least 4–6 years. Many states request multiple years of records during audits.

1. Reassess on change events

• Re-run the checklist after growth spurts, new product launches, hiring events, or acquisitions.

Real-world examples (brief)

• SaaS company: A subscription SaaS firm with rapid U.S. growth tracked monthly revenue and hit economic thresholds in three states within 9 months. Early registration and automation saved them penalties and simplified quarterly filings.
• Digital ad agency: Remote employees in several states created payroll withholding obligations and triggered nexus for service taxes in two states. A focused contractor audit identified where to register and retroactively file withholding returns, limiting exposure.
• Web hosting provider: Expansion of customer base into high-sales-volume states led to unexpected audit notices. A post-audit nexus checklist revealed missed marketplace rules and affiliate links treated as nexus triggers.

Key policies and legal background (authoritative sources)

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) — authorized economic‑activity nexus rules.
• State Departments of Revenue — primary source for each state’s current thresholds, taxability rules, and filing procedures (search each state’s revenue website).
• Streamlined Sales and Use Tax Governing Board — guidance for member states on simplifying sales tax administration (streamlinedsalestax.org).

Whenever you rely on a specific threshold or rule, confirm it on the relevant state revenue site before taking action.

Interlinks and related reading

• For background on the Wayfair decision and its effect, see our coverage of Wayfair Nexus.
• For a focused explanation of revenue and transaction-based thresholds, review our Economic Nexus page.
• If you need to register in multiple states, our guide on Multi-State Sales Tax Registration: When You Need to Register walks through timing and logistics.

Common mistakes and how to avoid them

• Mistake: Assuming no nexus without a physical office. Reality: Economic nexus and remote staff can create obligations.
• Mistake: Treating marketplace sales as only platform responsibility. Reality: Marketplace rules differ; confirm who must collect and remit for each state.
• Mistake: Waiting until audited. Reality: Early voluntary registration or voluntary disclosure programs often reduce penalties — but rules and availability vary by state.

Practical compliance strategies (my practice)

• Automate nexus triggers: I recommend a monthly automated report that flags states by revenue, transactions, employee presence, and affiliate activity. Set tooling to notify your finance lead when any flag trips.
• Maintain a nexus matrix: A one-page table listing each state, your nexus triggers there, registration status, filing frequency, and next-review date. Keep this in your shared finance folder.
• Use specialized tax engines: Integrate a sales-tax engine (Avalara, TaxJar, Sovos, etc.) that supports digital products and marketplace rules. These tools reduce manual errors but don’t replace quarterly reviews.
• Consider voluntary disclosure: If you discover past noncompliance, check the state’s voluntary disclosure program. These programs often waive penalties and limit look-back periods if you come forward voluntarily (search the state DOR for program details).

Record-keeping checklist (what auditors want)

• Dated sales reports by state and product type
• Exemption & resale certificates
• Contracts and affiliate/agent agreements
• Payroll logs and contractor location records
• Registration confirmations and past tax returns
• Correspondence with state DORs

FAQ (short answers)

• Does Wayfair mean I always collect sales tax? No — Wayfair allows states to set rules. Collect only where you meet a state’s nexus and taxability rules.
• Do I need to file income tax if I have sales tax nexus? Not necessarily. Nexus rules for income/franchise taxes are separate; you may have to file corporate or pass-through returns depending on activities and apportionment.
• How often should I reassess nexus? At minimum quarterly, and whenever you add employees, expand marketing affiliates, launch a new product, or enter a new marketplace.

Final checklist (quick reference)

• Produce 12-month revenue & transaction by-state report
• Verify each state’s economic threshold & product taxability
• Audit workforce & contractors
• Review affiliate/marketplace arrangements
• Register where required; set up collection
• File returns and apportion income if needed
• Keep 4–6 years of documentation

Professional disclaimer

This article is educational and does not constitute tax, legal, or accounting advice. Rules vary by state and change over time. Consult a qualified tax professional or state Department of Revenue for tailored guidance.

Author note

I am a CPA and CFP® with more than 15 years advising digital businesses on multi-state tax and compliance issues. My recommendations here reflect common best practices and client experience, but must be adapted to your facts and applicable law.

Sources

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
• Streamlined Sales and Use Tax Governing Board (streamlinedsalestax.org).
• State Departments of Revenue (for up-to-date thresholds and taxability rules).