State Nexus for Digital Goods and SaaS Companies

Quick overview

State nexus decides where your company must register, collect, or remit state-level taxes (sales, use, or state income/franchise tax). Since the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), states have broader authority to assert nexus based on economic or virtual contacts — not just physical presence. That change is the single most important reason digital goods and SaaS businesses need an active nexus strategy.

This article explains the practical triggers for nexus, how states differ in taxing digital goods and subscriptions, and a step-by-step compliance checklist you can use today.

Why nexus matters for digital goods and SaaS

• Financial risk: Failing to recognize nexus can result in back taxes, penalties, and interest. States also commonly assess sales tax for multiple prior years during audits.
• Operational impact: Registering in multiple states requires changes to invoicing, pricing, tax calculation, and bookkeeping.
• Competitive pricing: Sales tax implementation affects take-rate and customer pricing. Some companies absorb tax to remain competitive; others pass it to customers.

In my practice advising SaaS founders and finance teams, I’ve seen early nexus reviews prevent six-figure surprises during scaling. A simple periodic sales analysis and a well-configured tax engine often avert the biggest compliance headaches.

Common nexus triggers for digital goods and SaaS

States use different standards. The most common categories are:

1. Economic nexus

• Most states now have economic nexus laws post-Wayfair. Common thresholds are either $100,000 in sales or 200 transactions in a 12-month period, but thresholds vary by state and legislation changes regularly. Check the specific state statute or revenue department guidance.
• Economic nexus usually triggers sales tax collection obligations—in short, sell enough into a state and you must collect sales tax from customers there.

1. Physical presence

• Traditional nexus: offices, salespeople, employees, inventory, returned goods operations, or trade shows. For SaaS companies, having an employee or contractor in a state can create both sales and income tax nexus.

1. Digital or virtual presence

• Some states consider servers, data centers, or colocated hosting as establishing nexus. Others look at whether the company uses in-state agents, independent contractors, or marketplace facilitators.

1. Activity-based nexus

• Performing installation, support, professional services, or training in a state can trigger nexus. Similarly, extensive subcontracting or use of local agents can create a taxable connection.

1. Marketplace and platform rules

• States increasingly hold marketplace facilitators responsible for collecting sales tax on behalf of sellers. If you sell through a marketplace, check whether the marketplace or you must collect tax.

Are digital goods and SaaS taxable? (Short answer: it depends)

Whether a state taxes a digital product or SaaS subscription depends on how the law defines “tangible personal property,” “digital goods,” or “digital automated services.” Examples:

• Some states classify downloadable software or digital media as taxable tangible personal property.
• Other states exempt certain cloud services or treat SaaS as nontaxable professional/technical services.
• Many states now tax digital subscriptions (streaming, digital publications) but treat SaaS differently.

Because of this variability, conduct a state-by-state review. See our deep dive on Digital Products and State Sales Tax: Nexus, Registration, and Remittance for guidance specific to product types and sourcing rules.

Practical compliance checklist (step-by-step)

1. Map your customers and revenues by state for the last 12–24 months. Focus on states where you approach common thresholds (e.g., $100k or 200 transactions).
2. Identify employees, contractors, offices, servers, and third-party vendors by state.
3. Determine product taxability by state — separate SaaS, hosted software, maintenance, and professional services.
4. Register for sales tax permits in states where nexus exists. If you expect to meet a threshold soon, register proactively to avoid penalties.
5. Configure your billing and tax engine to collect the correct tax rate and apply exemptions where valid.
6. File returns and remit on time. Late filing carries interest and penalties in most states.
7. Maintain clear records: invoices, customer locations, contracts, proof of resale or exemption, and sourcing logic.
8. Reassess nexus quarterly or whenever you add a sales channel, new employees, or data center capacity.

If you prefer a guide to multi-state registration and rules for remote sellers, see our article on Multi-State Sales Tax Nexus: Rules for Remote Sellers.

Recordkeeping and audit preparedness

• Keep customer billing addresses, IP indicators, contract terms, and proof of delivery or access for at least the longest statute of limitations in the states where you do business (commonly 3–6 years; some states extend this).
• Log taxability determinations and the legal basis for sourcing rules you apply (e.g., customer location, point-of-use).
• Use automated tax logs from your tax engine as primary audit evidence and reconcile periodic reports to your general ledger.

Mitigating past exposure

If you discover uncollected tax liabilities:

• Consider a voluntary disclosure agreement (VDA) with the state to limit look-back periods and penalties. States typically offer VDAs via their revenue department websites.
• Prepare the same supporting records you would for an audit and be ready to negotiate payment terms.

Common misconceptions

• “No physical presence, no nexus”: False. Economic and activity-based nexus now create obligations without a storefront.
• “All SaaS is non-taxable”: False. State law varies; some states tax SaaS as a taxable digital product.
• “Marketplace sales are my platform’s responsibility”: Not always. Responsibility depends on state marketplace facilitator laws and contract terms.

Example scenarios

• Small SaaS startup: 12-month sales to State X total $120,000 with 350 transactions. State X’s law uses a $100,000/200-transaction test — the company must register and collect sales tax.
• Enterprise SaaS with in-state employees: Even modest in-state revenues can trigger income/franchise tax nexus if employees perform work there.
• Company using a cloud provider: Hosting servers in a state may create a nexus under that state’s rules — review contracts and hosting arrangements.

Technology and process recommendations

• Use a reputable automated tax engine (Avalara, TaxJar, Sovos) to calculate tax at checkout and manage filing. Automation reduces manual errors and audit risk.
• Integrate tax calculations into invoices and subscriptions to avoid retroactive adjustments.
• Maintain a tax compliance calendar for registration renewals, filing deadlines, and nexus reviews.

When to call a professional

Contact a state tax professional if you:

• Cross multiple state thresholds in a 12-month period.
• Employ workers or host infrastructure in a new state.
• Receive a notice from a state revenue department or face an audit.

In my experience, early engagement with a specialist often reduces exposure and accelerates negotiations for penalties or VDAs.

Resources and authoritative references

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) — U.S. Supreme Court decision that enabled economic nexus laws.
• State revenue department guidance — each state publishes nexus rules and filing instructions (search “[State name] Department of Revenue nexus”).
• Tax Foundation — comparative charts and summaries of state nexus thresholds.

Professional disclaimer

This article is educational and does not constitute legal, tax, or accounting advice. Rules vary by state and change frequently; consult a qualified state tax professional for advice tailored to your facts.

Next steps (quick action plan)

1. Run a 12-month revenue and transaction report by state.
2. Compare results to state thresholds and identify registration requirements.
3. Configure tax automation for affected states and register for permits.
4. Schedule quarterly nexus reviews and keep thorough records.

By treating state nexus as a core compliance process rather than an occasional checklist item, digital goods and SaaS companies can scale with fewer surprises and lower audit risk.