Why nexus matters for SaaS and digital services
For many SaaS and other digital-service businesses, the product is delivered across state lines with no storefront. That makes nexus one of the single most important compliance questions: if a state successfully asserts nexus, your company may need to register to collect sales tax, file returns, and answer audits — potentially for multiple years of back tax, penalties, and interest. The U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) made economic nexus broadly enforceable, and states have used that ruling to write or expand nexus rules for remote sellers and digital services (see the decision: https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf).
Authoritative background: state rules differ. The Tax Foundation and state tax agencies explain how taxability and thresholds vary by state; always check the state’s department of revenue for current rules (Tax Foundation overview: https://taxfoundation.org/sales-tax-digital-products/).
Two main nexus paths: physical and economic
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Physical nexus: traditionally established by tangible presence — offices, employees, inventory, equipment, or even a salesperson in a state. For SaaS providers, remote employees or contractors working from a state can create physical nexus for sales or income tax purposes in that state. States vary on how they treat remote workers and contractors, so document where employees and contractors live and work.
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Economic nexus: created by a volume-of-business test (sales dollars or number of transactions). After Wayfair, most states adopted economic thresholds (commonly expressed as $100,000 in sales or 200 transactions, or other dollar/transaction thresholds). However, thresholds and measurement periods differ by state — some use $100k, some $250k or $500k, and others have only dollar thresholds or only transaction tests. Always verify specific state rules before assuming compliance.
Is SaaS taxable? Not uniformly
Whether a state requires sales tax collection for SaaS or digital services depends on state law. States treat “software” and “digital goods” differently: some view SaaS as a taxable sale of tangible personal property, others treat it as a nontaxable service, and many states fall somewhere in between with partial taxability or special exemptions.
Because taxability varies, nexus alone does not automatically make SaaS sales subject to tax — it only creates the duty to evaluate whether the product sold is taxable in that state. See state guidance or summaries such as Tax Foundation’s state-by-state research for details (Tax Foundation: https://taxfoundation.org/sales-tax-digital-products/).
Practical examples (simplified)
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Example A — Economic nexus exceeded: Your SaaS charges $1,000/month to ten customers in State X. Annual receipts from State X = $120,000. If State X’s economic threshold is $100,000, you likely have economic nexus and must register and collect sales tax if SaaS is taxable there.
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Example B — Remote employee creates physical presence: One of your sales engineers is based in State Y and regularly meets local clients. Even if your company never leased office space, that employee may create physical nexus for sales or corporate income tax in State Y.
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Example C — Marketplace channel: If you sell subscriptions through a marketplace or app store, marketplace facilitator laws may shift collection responsibility to the marketplace. Confirm whether the marketplace collects tax (see internal guidance below and your marketplace contract).
Step-by-step compliance checklist
- Inventory your customers by state. Track total revenue and transaction count to each state on a rolling 12-month basis.
- Map your workforce and property. Note remote employees, contractors, servers, and inventory locations that could create physical nexus.
- Determine taxability in each state. For each state where you exceed a nexus threshold, confirm whether SaaS/digital services are taxable there.
- Register where required. If nexus and taxability exist, register for a sales tax permit or license with the state’s revenue department and collect sales tax on taxable transactions.
- Set up collection and remittance. Configure billing systems and choose tax automation (examples: Avalara, TaxJar) or clear manual procedures. Reconcile monthly/quarterly filings.
- File returns and pay. Respect filing frequencies and deadlines; states may require back filings to the date nexus was established.
- Consider voluntary disclosure programs. If you discover past noncompliance, many states offer voluntary disclosure agreements (VDAs) that limit lookback periods and reduce penalties; terms vary.
- Maintain documentation. Keep customer location evidence, exemption certificates, contracts, and employee work-location records.
Audit risk and lookback periods
States can audit businesses for multiple years. Lookback periods and statute-of-limitations rules vary: some states can go back several years if they determine you should have registered earlier. Voluntary disclosure can reduce the assessed period and penalty exposure; consult state-specific VDA guidance early in the discovery process.
Marketplace facilitators, resellers, and exemptions
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Marketplace facilitator rules: Many states require marketplace operators to collect and remit tax on behalf of sellers. If you sell through a marketplace, the operator may already handle collection, but verify whether your product is covered.
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Reseller exemptions: If your SaaS is sold to resellers or bundled with goods, collect valid resale certificates and document exemption justification.
Tools and systems to reduce risk
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Sales tax automation: Tax engines (Avalara, TaxJar, Sovos, Vertex) track nexus thresholds, calculate rates, and file returns. They reduce manual errors but require accurate product-taxability mapping.
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Analytics and dashboards: Maintain a rolling 12-month sales-by-state dashboard to detect threshold crossings early.
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Contract and terms language: Put clear tax allocation and responsibility language in customer and channel partner contracts.
When to consult a specialist
If any of the following apply, consult a state tax specialist or multistate tax attorney:
- You have employees, contractors, or servers in multiple states.
- You exceed economic thresholds in multiple states in a short period.
- You’re unsure whether your SaaS is taxable in a state with nexus.
- A state opens a nexus audit or demands past-due tax.
In my practice, early documentation and voluntary disclosure have materially reduced client exposure to penalties and extended audit disputes.
Common misconceptions
- “I’m only online, so I have no nexus.” Wrong. Economic nexus and remote workers can create nexus even without offices.
- “If I register, I’ll automatically owe massive back taxes.” Not necessarily — voluntary disclosure programs often limit exposure and penalties if you proactively address past noncompliance.
- “Marketplace sales relieve me of any responsibility.” Marketplace facilitators often collect tax, but you must confirm coverage and keep records proving the marketplace collected tax for those transactions.
Resources and internal links
- For practical registration and filing steps, see our guide to Multi-State Sales Tax Nexus: Rules for Remote Sellers.
- For SaaS-specific state treatment, review State Nexus for Digital Goods and SaaS Companies.
- If you sell through third parties, see Marketplace Facilitator Rules: Who Collects and Remits Sales Tax?.
Authoritative sources and further reading
- South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) — Supreme Court decision allowing economic nexus rules (https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf).
- Tax Foundation — sales tax on digital products and state-by-state analyses (https://taxfoundation.org/sales-tax-digital-products/).
- State Departments of Revenue — for current thresholds, taxability guidance, voluntary disclosure programs, and registration portals (links on each state’s revenue website).
Final professional disclaimer
This article is educational and written for general informational purposes; it is not legal or tax advice. State rules change frequently. For decisions that affect your business, consult a qualified tax advisor or state tax counsel who can analyze your facts and provide tailored guidance.
