E-Commerce Nexus and How It’s Changing

Imagine getting hit with a $330 million tax bill because you didn't know where your online sales triggered tax collection requirements. This nightmare scenario isn't fiction—it happened to a real company that missed the complex web of economic nexus laws.

For e-commerce sellers, the rules of the game have changed dramatically. States are actively hunting for online businesses that should be collecting sales tax but aren't. What's worse? These requirements are constantly shifting, leaving many sellers vulnerable without even knowing it.

We’ll explore the rapidly evolving landscape of e-commerce nexus with Nicole Power, Head of Filing at Zamp and a former Illinois Tax Auditor who’s seen these regulations from both sides.

Understanding Economic Nexus

The good thing about economic nexus is that we don’t have to define it for ourselves. Each state does it individually, and they have clear legislation around how you hit economic nexus and what those thresholds are. 

Right now, there are six different ways to establish economic nexus, depending on the states. This can be done by hitting specific thresholds, including:

• $100,000 in sales
• $100,000 in sales or 200 transactions
• $100,000 in sales and 200 transactions
• $250,000 in sales
• $500,000 in sales
• $500,000 in sales and 100 transactions

The best way to gauge whether you have sales tax liability in a state is whether you’ve hit one of those thresholds. If you have, you are responsible for collecting sales tax in those states.

How E-Commerce Nexus Evolved

Around 2015, state revenue departments nationwide discussed how to capture tax revenue from online sales, since it was slipping through their fingers. At that time, tax collection was strictly limited by physical nexus requirements, meaning states could only require businesses to collect taxes if they had a brick-and-mortar store, inventory in a warehouse, or employees working within state lines. Companies selling through online platforms, like Amazon, didn’t trigger these physical nexus requirements, leaving states unable to collect taxes on these growing transactions.

South Dakota’s Bold Move

As e-commerce expanded, states found themselves technologically outpaced. Around 2016, South Dakota implemented economic nexus, asserting that significant economic activity within their borders was sufficient to create a tax obligation. Online sellers immediately challenged the position, claiming no legislative foundation existed for such requirements.

The Landmark Decision

The conversation that began with “how do we get this online money” culminated in the landmark Supreme Court case of South Dakota v. Wayfair. The Supreme Court’s decision cleared the gateway for states to establish economic nexus. Businesses would have to comply with the thresholds that states set, regardless of whether or not they have a physical presence.

Today’s Landscape

Following the South Dakota v. Wayfair decision, states quickly enacted their economic nexus laws. While many initially adopted South Dakota’s threshold, they weren’t required to follow this exact formula. 

This explains today’s varied requirements across different states as they refine their approach based on their unique economic profiles and revenue goals. What began as a struggle to adapt tax policy to technological change has become one of the most significant shifts in sales tax administration in recent decades.

How Economic Nexus Impacts E-Commerce Businesses

E-commerce businesses must now monitor their sales tax activities across the country. Meeting or exceeding economic nexus thresholds now triggers a cascade of new obligations:

• Registering for sales tax permits
• Collecting the appropriate tax amounts on every transaction
• Remitting those funds to the state tax authorities

What makes economic nexus difficult is the lack of uniformity. While around 17 states follow similar rules, the remaining have adopted unique approaches. This creates a patchwork of requirements that businesses must navigate carefully.

For sellers, the key question has shifted from "Do I have a physical presence?" to "Where am I triggering economic nexus?" Companies must constantly monitor their sales volumes and transaction counts across all jurisdictions, identifying when and where they cross these invisible tax thresholds that activate collection and remittance responsibilities.

Why Some States Are Removing Economic Nexus Thresholds

The South Dakota v. Wayfair decision carefully established thresholds to protect smaller businesses from excessive compliance burdens. A threshold of $100,000 in sales and 200 transactions was believed to substantiate that the company had a big enough footprint in that state to require them to remit the tax and ensure there wasn’t an undue burden on the taxpayer who was collecting and remitting.

Several states are now repealing the 200 transaction limit because companies are receiving a large number of sales at a lower dollar amount. This means they are easily hitting the 200 transaction mark but not making a significant amount of revenue.

For example, a company sells 200 toothbrushes in a state for $2 each at a sales tax rate of 6%. This means you would owe $0.12 cents for every toothbrush you sell. In the end, the business would only owe the state a small amount of money, and it may take more money to get that to them if they have to file and submit the sales tax return.

States are starting to realize that the transaction amount is an undue burden on companies with high transactions and low-price sales. For this reason, many states are considering removing the transaction amount.

How Threshold Removal Impacts E-Commerce Sellers

In Alaska, the 200-transaction threshold was recently removed, and now, they just have the $100,000 sales threshold. So far, we are seeing that companies no longer need to register, collect, or remit in that state. This removes the burden of having to file sales tax returns.

On the state side, if you’re getting 10,000 returns filed and the companies are only remitting $5 in tax, how many people does the state have to employ to process the $5 returns? How cost-effective is that for the state as well?

What Happens if Companies Don’t Comply With Nexus Laws?

When businesses fail to meet their economic nexus obligations, the consequences can be severe. The financial impact extends far beyond simply paying the taxes that should have been collected.

Failing to Collect Required Sales Tax

If your business triggers economic nexus in a state but doesn't collect the required sales tax from customers, you face a particularly painful situation. The liability doesn't disappear—instead, you become personally responsible for paying:

• The full tax amount that should have been collected
• Penalty charges for non-compliance
• Interest that accumulates on the unpaid tax liability

This means paying the entire tax burden out of your company's profits, directly impacting your bottom line for sales that occurred months or even years ago.

Collecting But Failing to Remit

The situation becomes even more complicated if you collect sales tax but fail to register with the state or remit the collected funds. In this case, you could face:

• Registration violation penalties
• Late filing penalties
• Late payment penalties
• Interest charges on unremitted taxes

While criminal prosecution for sales tax violations is relatively rare, it remains possible in cases of egregious non-compliance, particularly when businesses collect but don't remit taxes over extended periods.

How High Can Penalties Be for Businesses That Don’t Comply?

The financial penalties for sales tax non-compliance can reach staggering proportions, particularly for larger businesses with substantial sales volumes across multiple states. In some cases, unpaid taxes, penalties, and interest have amounted to hundreds of millions of dollars for a single company—a severe financial blow that few businesses can absorb.

The stakes became painfully clear in a landmark 2019 Illinois case, in which one company agreed to a settlement of $330 million to resolve its sales tax liability. This number wasn’t even the full assessment—it was just the negotiated settlement amount.

The larger your business and the more widespread your customer base, the greater your potential exposure becomes if compliance falls through the cracks.

Red Flags that Can Trigger a Sales Tax Audit

Tax authorities are changing their approach to compliance efforts. In the past few months, states have begun sending what amounts to warning shots to businesses they suspect might not be properly registered for sales tax.

These notices carefully make you ask: "Are you sure that you registered for sales tax on the appropriate nexus date?" These communications signal that the state has detected a discrepancy between when a business was established and registered for sales tax collection. They're essentially giving businesses one last chance to correct potential compliance issues before taking more serious enforcement actions.

What's particularly telling is which companies are receiving these notices. SaaS (Software-as-a-Service) businesses are seeing them frequently—companies that traditionally weren't collecting sales tax before the Wayfair decision changed everything. State tax departments are deliberately targeting these post-Wayfair businesses where compliance might be weakest.

This targeted approach isn't random. The message is clear: states are actively looking for non-compliance and are getting better at finding it.

How Businesses Can Become Compliant

The questions you need to answer are straightforward: Did you hit nexus? Did you trip nexus thresholds in various states? You need to determine if you have a requirement to collect and remit sales tax. Once you've figured this out, you can work from there.

The good news is that there are pathways to compliance, even if you've missed obligations in the past. Your options depend largely on your current registration status.

If you've never registered but should have been collecting tax for years, you may be eligible for a Voluntary Disclosure Agreement (VDA). This approach allows you to come forward and say, "I made a mistake. I owe you money, and I want to make it right." VDAs typically reduce your look-back period, meaning you won't be responsible for the entire period of non-compliance. You can essentially write a check and move forward with a clean slate.

However, your path is different if you've already registered but haven't filed returns or remitted taxes. In this case, you'll need to file the missing returns and pay the associated penalties and interest—there's no shortcut available.

In either scenario, seeking expert guidance is crucial. Talk to someone who understands the nuances of sales tax compliance and has helped businesses through similar situations. Professional assistance can help you avoid costly mistakes that might prevent you from accessing your company's most beneficial compliance options.

How Can an Automated Sales Tax Solution Help With Nexus?

Quality sales tax providers take the guesswork out of compliance by tracking your nexus status across states. They monitor your sales thresholds and alert you when you're approaching or have triggered collection requirements in different jurisdictions.

These providers don't just notify you—they can handle the entire registration process, securing your tax ID numbers and managing all the paperwork. Essentially, they'll provide the necessary documentation for your records and then handle everything else behind the scenes, simplifying your compliance burden.

Another significant advantage is their sophisticated understanding of what actually counts toward nexus thresholds. Not all sales contribute to your economic nexus calculation—non-taxable sales typically don't count toward these thresholds. Without this expertise, you might mistakenly assume all your sales contribute to nexus determinations, potentially leading you to collect and remit taxes much earlier than legally required.

This level of specialized knowledge helps ensure you're neither over-complying (which creates unnecessary work and potential customer friction) nor under-complying (which creates liability). The right provider will help you meet your exact obligations at precisely the right time.

How to Choose the Right Sales Tax Solution

Do your homework. That's the most important advice when selecting a sales tax provider. What you really want to investigate is the composition of their team, specifically, what kind of sales tax background and expertise they have on staff.

If you're just looking at a software solution built by developers without tax expertise, be cautious. Any tax compliance software is only as good as the tax information fed into it. Without deep knowledge of the laws, legislation, and rates across different jurisdictions, even the most sophisticated platform will fall short.

A provider without genuine tax expertise is probably not delivering the best service possible. When evaluating potential partners, make this your primary question: What's their tax team like? The answer will tell you everything you need to know about whether they can truly keep you compliant in today's complex sales tax landscape.

Wrapping Up

Economic nexus has permanently changed the sales tax landscape for e-commerce businesses. With states actively targeting non-compliant sellers and penalties reaching the hundreds of millions, the risks of mismanaging your sales tax obligations have never been higher.

Need Help With Sales Tax Compliance?

Zamp combines intelligent software with expert service to completely handle your sales tax compliance. We don't just give you tools—we take care of sales tax for you. That includes:

• Full-Service Management: We handle everything from nexus tracking and calculations to registrations and filings, all with minimal oversight needed from you.
• Multi-Channel Coverage: Seamless tax compliance across your website and marketplaces, with integrations to Amazon, Shopify, Adobe Commerce, BigCommerce, QuickBooks, and more.
• Risk Monitoring & Alerts: Proactive notifications when you reach nexus thresholds or compliance issues arise. We stay on top of data and state changes so you don't have to. 
• One Price, No Surprises: Predictable pricing that includes both software and expert service. Why deal with more complexity in your sales tax approach?
• Done-For-You Onboarding: We extract and import all your historical data. 

See how you can save time and stay sales tax compliant with Zamp. Book a call below!