Quick overview

Remote businesses that sell digital services—software-as-a-service (SaaS), streaming, e-learning, downloadable products, or in-app purchases—may need to collect state sales tax when customers are located in states that tax those services. After the U.S. Supreme Court’s Wayfair decision (2018), states can require out-of-state sellers to collect sales tax based on economic nexus rather than a physical presence (South Dakota v. Wayfair, Inc.). That means remote sellers must track where customers are, how states define taxable digital services, and whether they meet thresholds for registration and collection (see NCSL; Tax Foundation) (NCSL, Tax Foundation).

Why this matters for remote businesses

Failing to collect sales tax where required can lead to back taxes, interest, penalties, and additional compliance costs. In my work advising remote sellers and SaaS providers, I’ve seen two recurring patterns: businesses underestimate where they have nexus, and they assume all digital services are either always taxable or never taxable. Both assumptions are risky because state rules vary widely.

How does nexus work for digital services?

  • Economic nexus: Most states set a sales or transaction threshold (for example, $100,000 in sales or 200 transactions, though thresholds vary) that triggers a requirement to register and collect sales tax. Check each state’s specific threshold; many follow similar thresholds but others use different metrics or separate rules for services.
  • Marketplace facilitator rules: If you sell through a marketplace (e.g., app stores, platforms), the marketplace may be required to collect and remit sales tax on your behalf. That shifts the compliance burden but requires you to confirm how the platform reports and whether it covers all states where you have customers.
  • Sourcing rules: States use origin- or destination-based sourcing to determine which tax rate applies. For services and digital goods, most states use the customer’s location (destination sourcing), but this is not universal.

(Authoritative sources: NCSL and Tax Foundation summaries of state digital tax laws: https://www.ncsl.org and https://taxfoundation.org.)

What counts as a taxable digital service?

States use different language; common categories include:

  • Downloadable software (permanent downloads)
  • Streaming audio/video
  • Online subscriptions and digital publications
  • SaaS and hosted software (taxability differs by state)
  • E-learning or online courses (sometimes taxed, sometimes exempt)
  • In-app purchases and virtual goods

Example: New York and Texas have explicit rules that can treat certain digital products and some digital services as taxable (state revenue department guidance). Other states, like Florida, may not tax the same items in the same way. Always check the state’s Department of Revenue guidance for the most current definitions.

Real-world examples

  • Streaming service: A subscription platform expanded into multiple states and, after an audit, had to remit back taxes where state law treated streaming as taxable. The company implemented geolocation-based collection and avoided further penalties.
  • SaaS vendor: A small SaaS provider assumed its cloud-hosted software was exempt in all jurisdictions. After a nexus analysis, it found several states considered its product taxable and registered to collect sales tax going forward.

Practical checklist for compliance (step-by-step)

  1. Map customers by state: Start collecting basic location data (billing and delivery addresses or IP geolocation) so you can measure state-by-state sales and transactions.
  2. Run a nexus assessment quarterly: Compare your sales and transaction figures against each state’s economic nexus thresholds. Use the state’s Department of Revenue pages or an up-to-date database (NCSL, Tax Foundation) for reference.
  3. Determine taxability by state: For each state where you exceed nexus thresholds, confirm whether your specific digital product or service is taxable. State statutes and Department of Revenue guidance are the primary sources.
  4. Register where required: If a state requires collection, register for a sales tax permit before collecting tax. Registration timelines and retroactivity rules vary by state.
  5. Configure tax collection: Implement tax rules in your checkout process, accounting software, or via a tax engine. Automating rates, exemptions, and filing schedules reduces errors.
  6. Consider marketplace facilitator rules: If you sell through marketplaces, confirm whether they collect tax on your behalf and obtain documentation to prove compliance.
  7. Keep records: Maintain invoices, exemption certificates, and nexus analyses for audits (generally 3–7 years depending on state law).
  8. File and remit: File according to each state’s return frequency (monthly, quarterly, or annually) and remit collected sales tax on time.

Registration, filing, and remittance nuances

  • Filing frequency: States require different frequencies based on your volume. High-volume sellers often file monthly; smaller sellers may file quarterly or annually.
  • Use tax vs. sales tax: If your business purchases digital services for use in a state where they are taxable and the seller did not collect tax, you may owe use tax. This often affects businesses that buy digital software or services from out-of-state vendors.
  • Nexus changes: Mergers, new product lines, or changes in marketing strategy (affiliate programs, targeted ads) can create nexus. Review operations after any business change.

Technology and automation

Modern tax engines (e.g., Avalara, TaxJar) and accounting platforms can:

  • Geolocate customers and apply correct tax rates
  • Maintain up-to-date taxability rules by jurisdiction
  • Offer filing and remittance features or exports for your accountant
    Automation reduces manual errors, but you still need to verify that the provider supports the states where you do business.

Internal resources on FinHelp.io that can help:

Common mistakes and how to avoid them

  • Mistake: Assuming digital goods are always exempt. Fix: Verify each state’s law; exemptions can be narrow and product-specific.
  • Mistake: Ignoring marketplace facilitator rules. Fix: Obtain documentation from the marketplace showing which states they remit in and what they cover.
  • Mistake: Poor recordkeeping. Fix: Keep organized transaction logs, exemption certificates, and nexus analyses to shorten audit exposure.

Penalties and audits

States can assess back taxes, interest, and penalties for uncollected sales tax. Penalties vary by state and may include failure-to-file fines, interest on unpaid amounts, and, in severe cases, criminal penalties for intentional evasion. Prompt voluntary disclosure and remittance programs in many states can reduce penalties if you proactively address noncompliance.

Frequently asked questions (brief)

Q: Do marketplaces collect tax for sellers?
A: Often yes — marketplace facilitator laws require large platforms to collect and remit tax in many states. Confirm what the marketplace covers and whether you still have registration obligations.

Q: Is SaaS taxable everywhere?
A: No. States differ. Some tax SaaS like tangible software; others exempt cloud-hosted services. Always confirm with state guidance.

Q: How often should I review nexus?
A: At least quarterly, and whenever sales volumes, transaction counts, or business models change.

Resources and authoritative references

Final practical tips (from practice)

  • Start simple: collect location data and run a prioritized nexus list of the top 10 states by revenue. Register in the highest-risk states first.
  • Use an automated tax engine for calculation and reporting, but validate its state coverage annually.
  • Work with a multistate sales tax specialist for an initial nexus and product taxability study—this upfront cost often pays for itself by preventing audits and incorrect filings.

Professional disclaimer: This article is educational only and does not constitute tax, legal, or accounting advice. State laws change frequently; consult a qualified tax professional and the relevant state Department of Revenue for guidance tailored to your situation.

(Updated 2025.)