Quick overview
Nexus for SaaS and digital services decides when a U.S. state can require your business to register, collect and remit sales tax, file corporate income tax returns, or withhold payroll taxes. After the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., many states adopted “economic nexus” rules that reach sellers with substantial in-state sales even without a physical presence (see Wayfair, 138 S. Ct. 2080 (2018)). For up-to-date state rules, consult state revenue departments and national trackers like the National Conference of State Legislatures (NCSL) and Tax Foundation (sources below).
Why nexus matters for SaaS and other digital services
- Tax exposure: If nexus exists, you may need to collect sales tax on subscriptions or digital goods, file state income tax returns, or remit payroll taxes for remote employees.
- Administrative burden: Multi‑state registration, filing, and recordkeeping increase cost and complexity.
- Financial risk: Failing to recognize nexus can create liability for back taxes, penalties, and interest.
In my work advising SaaS founders, I routinely see businesses underestimate nexus risk from remote employees and third‑party contractors. Identifying nexus early prevents costly retroactive compliance.
How states create nexus — common triggers
- Physical presence
- Traditional trigger: offices, employees, inventory, servers, or property in a state usually create both sales and income tax nexus. Many states still use physical presence for payroll and withholding obligations.
- Economic presence (economic nexus)
- After Wayfair, states adopted thresholds based on sales dollars or transaction counts. Thresholds vary by state and by tax type. Track each state’s rule rather than rely on a single national number (NCSL, Tax Foundation).
- Remote workforce and employees
- An employee teleworking from a state can create nexus for payroll withholding and may create sales or income tax nexus for the employer.
- Affiliate, agent, or referral relationships
- Payments to in‑state affiliates, agents who solicit business, or certain referral arrangements may establish nexus.
- Marketplace and third‑party platforms
- Marketplace facilitator laws require marketplaces (e.g., app stores, platforms) to collect and remit sales tax for third‑party sellers; however, a SaaS seller’s liability depends on whether the seller transacts on the marketplace or directly with customers.
- Digital goods and software classification
- States differ on whether SaaS is taxable as a service, as software, or exempt. Taxability impacts whether nexus creates a sales tax collection duty.
What nexus means for sales tax vs. income tax
- Sales tax nexus determines whether you must register to collect and remit sales/use tax on taxable sales into a state.
- Income tax nexus (apportionment nexus) determines whether a state can require filing and paying corporate (or pass‑through entity) income tax based on business activity there.
These are separate analyses: you can have sales tax nexus without income tax nexus, and vice versa. Treat each tax type independently.
Practical compliance steps (step‑by‑step checklist)
- Inventory activities by state
- List where you have employees, contractors, servers, offices, inventory, affiliates, or significant customers.
- Track revenue and transaction counts by state
- Maintain rolling reports of sales dollars and number of transactions by customer shipping/ billing/usage location.
- Monitor classifications
- Determine how each target state treats SaaS, digital goods, subscriptions, and bundled offerings. Taxability rules differ widely.
- Register where required
- If you meet a state’s nexus test, register with the state tax authority promptly. Many states offer voluntary disclosure programs that can limit penalties for past periods.
- Implement collection and accounting
- Configure billing systems to collect the correct tax rate by jurisdiction and item. Use tax engines or automated services when you scale.
- File returns and remit taxes
- File timely returns and remit taxes even if liability is small; late filings can trigger penalties.
- Keep documentation
- Maintain contracts, nexus determinations, customer location evidence, and exemption certificates for audits.
- Reassess regularly
- Nexus triggers change as you expand, hire remote employees, enter new referral partnerships, or launch marketplaces.
Examples and scenarios
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Remote employee: A developer working from California for a Delaware‑based SaaS firm can create employer payroll withholding and may establish sales or income tax nexus for the employer in California. Treat remote staff locations conservatively; register if unsure.
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Economic threshold: Suppose State A requires registration when either $100,000 in sales or 200 transactions are exceeded. If your national subscription sales total $120,000 with 250 subscribers in State A, you likely have nexus under that state’s rule. (State thresholds and definitions vary—see state guidance and consolidated trackers.)
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Marketplace: If you sell through an app store that collects tax under marketplace facilitator rules, the marketplace may collect tax for those transactions. However, direct sales to customers outside the marketplace can still create nexus for you.
Common mistakes and misconceptions
- Mistake: “No physical presence, no taxes.” After Wayfair, economic nexus makes this false in many states.
- Mistake: Treating taxability of SaaS as uniform. States vary: some tax SaaS as taxable software or services, others exempt it.
- Mistake: Ignoring payroll and income tax nexus. Employers often focus only on sales tax but miss withholding and corporate income tax filing obligations.
Recordkeeping and audit preparedness
- Keep customer invoices, billing addresses, usage IP logs, contract terms, and exemption certificates for at least 4–7 years depending on the state.
- Document nexus determinations and the facts that led to registrations or non‑registrations. In audits, proactive records reduce assessment risk.
Tools, partners, and resources
- Tax engines: Avalara, TaxJar, Vertex — automate rate lookup, exemption handling, and filings.
- Professional advisors: Work with a CPA or sales tax specialist for nexus studies and voluntary disclosure negotiations.
- State and national trackers: NCSL and Tax Foundation publish summaries of state rules and Wayfair implementations (see references below).
Useful internal reading on FinHelp:
- For a practical checklist to evaluate your footprint, see our State Nexus Checklist for Digital Service Providers: https://finhelp.io/glossary/state-nexus-checklist-for-digital-service-providers/
- For SaaS-specific filing and multistate sales tax guidance, review Multistate Sales Tax Essentials for SaaS and Digital Service Providers: https://finhelp.io/glossary/multistate-sales-tax-essentials-for-saas-and-digital-service-providers/
- For background on the Wayfair decision and its state‑level impact, read our Wayfair Nexus page: https://finhelp.io/glossary/wayfair-nexus/
Professional tips I use with clients
- When hiring remote workers, update your payroll and nexus map before the hire. That single remote employee can change your state obligations.
- Use conservative sourcing: source income and sales to the customer’s billing or usage location unless contract terms specify otherwise and the state accepts that sourcing method.
- Consider voluntary disclosure agreements (VDAs) if a nexus issue is discovered. VDAs often limit lookback periods for assessments and reduce penalties.
What to expect during expansion
- Registration windows: Some states require registration immediately once nexus is met; others allow a small grace period. File proactively to avoid penalties.
- Audit focus: States frequently audit out‑of‑state sellers after Wayfair enforcement began. Expect requests for transaction-level customer location evidence.
Bottom line
Nexus for SaaS and digital services is a facts‑and‑state‑specific determination. After Wayfair, economic presence matters. Treat nexus as an ongoing compliance process: map your footprint, track sales and transactions by state, seek expert help for ambiguous cases, and document your decisions.
Professional disclaimer
This article is educational and does not substitute for personalized tax advice. Consult a CPA or state tax attorney about your specific facts and to confirm current state rules before acting.
Authoritative sources and further reading
- South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
- National Conference of State Legislatures (NCSL), “Sales Taxation of Digital Products and Services” — https://www.ncsl.org/ (state-by-state summaries).
- Tax Foundation, “Economic Nexus” and state trackings — https://taxfoundation.org/.
- State departments of revenue — consult the revenue site for each state where you do business.
If you want, I can prepare a simple nexus‑mapping checklist tailored to your company’s legal structure, customer footprint, and hiring plans.