Quick overview

Remote service providers — consultants, SaaS vendors, freelancers, virtual assistants, and other businesses that deliver services across state lines — must evaluate whether they have “nexus” in any state where they have customers. Nexus is the legal link that allows a state to require registration, collection of sales/use tax, or the filing of state income tax returns. The triggers and rules differ by state and by tax (sales tax vs. income/franchise tax), so a one-size-fits-all approach does not work.

(For authoritative background on state sales-tax nexus rules, see the National Conference of State Legislatures summary: https://www.ncsl.org/research/fiscal-policy/state-sales-tax-nexus.aspx.)

Short history and why it matters

Historically, nexus relied heavily on a business’s physical presence in a state. Key cases include Quill Corp. v. North Dakota (1992), which required a physical presence for sales tax collection, and South Dakota v. Wayfair, Inc. (2018), which allowed states to use economic presence to require out-of-state sellers to collect sales tax. After Wayfair, many states adopted “economic nexus” standards so that businesses without a brick-and-mortar presence can still have collection obligations based on sales volumes or transaction counts.

In my practice working with remote-service clients, I’ve seen Wayfair shift most compliance conversations from “Do we have an office there?” to “Have we exceeded thresholds for economic nexus or created nexus through other activities?”

What kinds of nexus can a remote service provider create?

  • Physical presence nexus: An office, inventory location, or employee living/working in a state. Even occasional in-person visits by employees or contractors can trigger nexus in some jurisdictions.
  • Economic nexus: States may impose nexus when a business has a certain dollar amount of sales or number of transactions into the state. Thresholds vary by state and by tax type (sales vs. income). Many states use thresholds such as $100,000 in sales or 200 transactions, but you must confirm the current test for each state (see NCSL and state department of revenue websites).
  • Agent/affiliate (click‑through) nexus: Using agents, affiliates, or referrals in a state that result in sales can create nexus under some state laws.
  • Marketplace facilitator and marketplace seller rules: Marketplaces (platforms) may be required to collect and remit sales tax on behalf of third-party sellers; that affects whether individual service sellers need to register directly.
  • Income/franchise tax nexus: Separate from sales tax, states have their own tests for corporate or pass‑through entity income tax filings. Tests often consider payroll, property, or sales within the state or may apply apportionment formulas.
  • Service-specific rules: Some states tax specific services (e.g., certain digital services, software as a service, telecommunication, professional services). Whether a given service is taxable depends on state statutes and regulations.

How nexus is determined for services (practical points)

  • Identify the tax type: Sales tax and state income tax are evaluated differently and have different triggers.
  • Sourcing rules: For sales tax, states use sourcing rules to determine which state’s rules apply to a sale — often based on where the service is performed, where the benefit is received, or the customer’s location.
  • Taxability of services: Not all services are taxable in every state. A consulting engagement might be taxable in one state but exempt in another. Check state law or revenue department rulings.
  • Employee and contractor activity: Employees, contractors, or agents who solicit business, provide services, or provide support in a state can create nexus.

Step‑by‑step compliance checklist (practical actions)

  1. Map customers and activity by state. Keep transaction-level records (state, date, amount, account ID). This is the foundation for any nexus analysis.
  2. Track sales and transactions in each state. For economic nexus, you need cumulative sales or transaction counts for the look‑back period states require (often a trailing 12 months).
  3. Classify your offerings. Determine which of your services are taxable in which states. If you sell software, digital goods, or bundled services, check evolving state guidance.
  4. Review where employees, contractors, or representatives work or visit. Even short-term visits or trade-show attendance may create nexus in some states.
  5. Check marketplace rules. If you sell through a marketplace, the platform may be required to collect and remit sales tax on your behalf. That can change registration obligations.
  6. Register promptly when nexus exists. Register for sales tax permits and for state tax accounts before collection becomes overdue to reduce penalties.
  7. File returns and remit tax. Meet each state’s filing frequency and payment rules. Keep records and document sourcing decisions.
  8. Consider voluntary disclosure agreements (VDAs) if you discover past noncompliance. Many states offer programs to limit look‑back periods and reduce penalties when you voluntarily come forward. Consult a tax professional before filing.

Documentation and systems

  • Use accounting software to tag transactions by state and product/service code. Enable reporting that shows sales by jurisdiction and transaction counts.
  • Retain contracts, invoices, shipping and billing addresses, and evidence of where services were performed. These support sourcing and taxability decisions if a state questions your position.
  • Establish a compliance calendar for each state with registration, filing, and renewal dates. (See our planner: Practical Steps to Build a Small-Business Tax Compliance Calendar.)

Consequences of getting nexus wrong

If a state determines you had nexus and you failed to register, you may owe back taxes, penalties, and interest. States often audit multistate taxpayers and can assess tax for several prior years. Penalties vary but can be significant; voluntary disclosure programs can mitigate exposure.

Common mistakes I see with remote providers

  • Treating all services the same: Not separating taxable from nontaxable services leads to over‑ or under‑collection.
  • Ignoring non‑sales taxes: Income/franchise tax nexus and payroll withholding obligations are separate and can be triggered even when sales tax is not required.
  • Relying on marketplace assumptions: Some sellers incorrectly assume the marketplace handles all compliance; depending on the state and the transaction, the seller may still have obligations.
  • Poor recordkeeping: Without transaction-level detail by state, responding to audits or calculating liability becomes costly.

Example scenarios (realistic, anonymized)

  • A freelance web developer in State A sells custom websites to clients across the country. Although the developer has no office outside State A, the developer exceeded economic thresholds for sales in State B and had an employee who visited a client in State C. The developer registered and began collecting sales tax in State B, and filed income tax returns in both B and C (apportionment rules applied).

  • A SaaS firm selling subscription software used by users in many states discovered that a subset of states tax SaaS. The firm updated its billing system to identify customer locations, registered where required, and implemented tax‑collection rules based on product code and customer state.

Practical tips and risk‑reduction strategies

  • Build nexus checks into billing and CRM systems so you can run periodic reports by customer state and product.
  • Set internal thresholds for when to consult counsel or a CPA (for example, crossing a specific dollar amount or 100+ transactions in a state within 12 months).
  • Use nexus analysis services or multistate tax software for larger or rapidly growing businesses.
  • Consider contract language that clarifies customer location and billing address responsibility; however, contracts do not eliminate statutory tax obligations.

Where to get reliable information

For guided steps specific to different service models, see these related FinHelp resources:

Common FAQ (quick answers)

  • Do I owe tax in every state where I have customers? Only if your activities meet that state’s nexus tests for the tax type involved. Many states have economic thresholds and other specific rules.
  • Are digital services automatically taxable? No. States differ widely on whether digital goods and services are taxable. Check each state’s law.
  • Can I avoid nexus by using independent contractors? Not always; independent contractors who create a business presence or solicit sales may still create nexus.

Final checklist (action items)

  • Run a 12‑month sales and transaction report by state.
  • Review where employees/contractors travel or perform work.
  • Confirm which of your services are taxable by state.
  • Register and begin collection when nexus exists; if noncompliant historically, evaluate VDA options.
  • Document decisions and maintain a multistate compliance calendar.

Professional note and disclaimer

In my work advising remote‑service clients, proactive mapping and early registration usually reduce audit risk and overall exposure. This article is educational and not individualized tax or legal advice. For specific determinations about nexus and tax obligations, consult a licensed CPA or tax attorney familiar with the states where you do business.

Sources: U.S. Supreme Court – South Dakota v. Wayfair, Inc. (2018); NCSL state nexus resources (https://www.ncsl.org/research/fiscal-policy/state-sales-tax-nexus.aspx); state Departments of Revenue; IRS guidance (https://www.irs.gov/).