Sales & Use Tax in the U.S.: Navigating Complexity, Ensuring Compliance, and Capitalizing on Automation

Introduction

Sales and use tax compliance is a complex and often overlooked area of risk for businesses operating in the United States. With over 13,000 state and local jurisdictions, companies face significant challenges in determining taxability, tracking evolving nexus thresholds, managing exemption certificates, and filing accurately across multiple states. The rise of remote selling, digital services, and shifting state enforcement priorities has only heightened the likelihood of non-compliance—often resulting in costly penalties, back taxes, and reputational damage. Despite efforts to comply, many organizations discover too late that they should have been collecting and remitting sales tax in jurisdictions where they’ve unknowingly established economic nexus.

Automation offers a practical and scalable solution to these challenges. By integrating tax engines and systemized compliance workflows, businesses can streamline rate determination, improve data accuracy, and reduce manual effort while maintaining audit readiness. Solaris partners with clients to assess exposure, remediate compliance gaps, and implement robust tax solutions tailored to their business model. This whitepaper outlines the key elements of U.S. sales and use tax, and demonstrates how automation can transform sales tax from a reactive burden into a strategic advantage.

Understanding the U.S. Sales and Use Tax Landscape

Unlike countries with centralized value-added tax (VAT) systems, the United States imposes sales and use taxes at the state and local levels. There is no federal sales tax, and each state has the authority to establish its own rules, rates, exemptions, and administrative procedures. Local governments – including cities, counties, and special taxing districts – may add additional layers of taxation, increasing the compliance burden.

Adding to this complexity is the evolving treatment of digital goods and services. More than 30 states now impose sales tax on digital products and services – including downloadable software, streaming content, e-books, and cloud-based services. In some jurisdictions, SaaS is taxable as tangible personal property or a service; in others, it is exempt or subject to specific conditions. These discrepancies can lead to inconsistent compliance approaches if not carefully managed.  

Furthermore, rate structures are highly fragmented. U.S. sales tax rates are determined by the combination of state, county, city, and district-level rates. Thousands of possible combinations exist nationwide – and they change frequently. For companies selling digital products remotely, this means that tax calculations must consider not only the nature of the product, but also the exact location of the buyer.

Complicating matters further, some customers choose to self-assess and remit use tax directly to their state, particularly in B2B transactions. In such instances, the seller may not be required to collect and remit tax on the transaction. Identifying and documenting these cases accurately is essential to avoid duplicate reporting or exposure.

Common Compliance Challenges and Risks

One of the most fundamental sales tax risks is determining where a business is obligated to collect and remit tax. Historically, nexus was limited to physical presence (such as offices, inventory, or employees within a state). However, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018) dramatically changed the landscape by allowing states to impose economic nexus thresholds based solely on sales volume or transaction count—even in the absence of physical presence.

Most states have adopted Wayfair-style thresholds—commonly $100,000 in sales or 200 transactions per year. Tracking and interpreting these thresholds across jurisdictions presents significant operational challenges, particularly for high-volume sellers such as SaaS providers or digital marketplaces.

Beyond nexus, companies must navigate taxability determinations, exemption certificate management, rate sourcing, and return filings. These tasks are complicated by varying jurisdictional interpretations of product or service taxability. For example, one state's classification of SaaS as non-taxable may differ entirely from a neighboring state’s treatment. Missteps in classification can lead to incorrect tax collection and audit exposure.

Accurately identifying when a customer has self-reported and self-remitted taxes also adds a layer of complexity, especially when working with institutional or enterprise clients. Businesses must confirm these arrangements in writing and maintain documentation to prevent redundant collection or filing errors.

Voluntary Disclosure Agreements: An Important but Complex Tool

For businesses that discover they have historical sales or use tax exposure – particularly due to unregistered nexus or under-collection – Voluntary Disclosure Agreements (VDAs) can offer a path forward. A VDA is a formal agreement between a business and a state tax authority that allows the business to come forward proactively, register for future compliance, and settle past liabilities under favorable terms. In exchange for voluntary participation and full disclosure, most states agree to limit the lookback period (typically 3-4 years), waive penalties, and in some cases, interest.

While VDAs are a powerful risk mitigation tool, they are not without challenges. Each state has its own procedures, documentation requirements, and negotiation protocols. The process is typically conducted anonymously through a third party and requires careful estimation and supportable documentation of prior liabilities. Mistakes in this phase can delay resolution or undermine the benefits of participation.

VDAs also require businesses to commit to full compliance going forward. This often includes implementing new internal controls, automating sales tax calculation, and ensuring accurate product or customer tax classifications. When executed effectively, the VDA process can provide a clean break from non-compliance and a structured path toward future readiness.

The Business Case for Automation

As compliance obligations increase in volume and complexity, manual methods such as spreadsheets and rate tables are no longer sufficient. Automation has become essential for reducing errors, saving time, and maintaining accurate filings across multiple jurisdictions. Modern tax engines can integrate with ERP systems, CRMs, billing software, and e-commerce platforms to calculate tax in real time based on product type, buyer location, and current rates.

In addition to calculation, automation systems, such as Avalara, Vertex, or Sovos, manage exemption certificate tracking, monitor nexus thresholds, prepare returns, and maintain audit-ready documentation. These tools also enable real-time reporting dashboards, exception alerts, and data visualization that allow finance and tax leaders to stay ahead of risks.

Automation is particularly effective for businesses in the SaaS and digital services sectors, where customer locations, product classifications, and taxability rules vary dramatically. With the right configuration, tax engines can streamline compliance while supporting nuanced use cases—such as exempt customers, recurring billing, or customer-directed tax remittance.

Conclusion

Navigating the ever-changing landscape of U.S. sales and use tax compliance—especially for SaaS and digital service providers—requires proactive strategy, accurate systems, and specialized expertise. The expansion of economic nexus following South Dakota v. Wayfair, coupled with inconsistent state rules around digital taxability, continues to create exposure for businesses of all sizes.  

Navigating U.S. sales and use tax requires expertise and proactive strategies. Our Solaris team has deep experience helping clients navigate these challenges. We help to ensure that clients understand which offerings are taxable, where nexus exists, and whether customers are responsible for self-remitting taxes. In addition to system configuration, we often support tailored customer communication to clarify tax responsibilities – especially in cases involving direct pay permits or self-remittance arrangements. From exposure assessments and voluntary disclosure agreements to automation implementation and ongoing compliance support, Solaris helps clients streamline tax operations, reduce risk, and stay ahead of evolving regulatory requirements. Contact a Solaris consultant to learn more at info@solarisadv.com.

References

1. Ernst & Young. (2025). Worldwide VAT, GST and Sales Tax Guide 2025. Retrieved from https://www.ey.com/en_gl/technical/tax-guides/worldwide-vat-gst-and-sales-tax-guide

2. Avalara. (n.d.). U.S. sales tax and digital services. Retrieved from https://www.avalara.com/vatlive/en/country-guides/north-america/us-sales-tax/us-digital-services-sales-tax.html

3. Tax Foundation. (n.d.). South Dakota v. Wayfair, Inc. Retrieved from https://taxfoundation.org/taxedu/glossary/south-dakota-v-wayfair/

4. Avalara. (n.d.). Sales tax nexus 101. Retrieved from https://www.avalara.com/us/en/learn/guides/small-business-faq/sales-tax-nexus-101.html

5. U.S. Supreme Court. (2018). South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018).

‍