Recent Changes to Sales Tax Nexus and the Impact on Technology Companies

When businesses have sales tax nexus in a state, they are required to remit and pay sales taxes to the state. This year in Indiana, state legislators changed the definition of what generates nexus for sales tax purposes – and Indiana wasn’t the only state to make changes.

New Nexus Requirements

Prior to this law change in Indiana, a business with no physical presence in the state would still generate nexus for sales tax purposes if they had either gross sales into Indiana exceeding $100,000 or 200 or more separate sales transactions into Indiana. Beginning Jan. 1, 2024, the state eliminated the 200-or-more sales transaction threshold so that only gross sales volume was considered when determining if a business should collect and remit sales taxes to the state.

Navigating Sales Tax Across Multiple Jurisdictions

While this change came as no surprise as many states are moving to eliminate their own sales transaction thresholds for economic nexus, it brings to the forefront sales tax considerations for companies with sales throughout the country. Businesses selling to customers outside of their state should familiarize themselves with other states’ economic nexus guidance to fully understand their tax exposure for interstate commerce.

Forty-five states, Washington, D.C., and Alaska’s localities impose sales tax and have enacted economic nexus statutes. If a seller exceeds the economic nexus threshold, the seller is required to collect that jurisdiction’s sales tax on taxable sales to that jurisdiction’s residents. If a seller does not collect the sales tax and is audited, the state will hold the seller responsible for the sales tax it did not collect. States can audit the entire period after a seller first establishes sales tax nexus (generally limited to 8 to 10 years).

Sales Tax Liability for Technology Products

When we consider sales tax, we typically think of tangible personal property. However, many states subject sales of technology products (like SaaS or remote access software) to sales tax. State statutes and regulations do not change quickly and have not adapted easily. So, states generally apply antiquated statutory language to determine whether the sales of technology products are subject to sales tax. Understanding whether a state taxes a particular product is not straightforward and requires a deep understanding of the product, its features, and thorough research into a jurisdiction’s sales tax guidance.

Putting these concepts together means that a tech company could have eclipsed an economic nexus threshold by selling its product or service to customers in a state where that product or service could be subject to sales tax. If the tech company has not collected sales tax from its customers after it established nexus, it could be looking at a significant sales tax exposure item.

KSM closely follows legislative activity across the country. Thus, if you have questions about how specific states handle sales tax, please contact your KSM advisor or fill out this form.