Multi-State Sales Tax When You Already Owe It

We found out we had a sales tax problem the way most businesses find out: an accountant mentioned it during a routine review, almost as an aside. We had been selling into several states for over a year. We had not been collecting sales tax in most of them. We did not know we were supposed to.

How This Happens

The legal framework changed in 2018 when the Supreme Court decided South Dakota v. Wayfair. Before that ruling, a business generally only had to collect sales tax in states where it had a physical presence: an office, employees, or inventory. After it, physical presence is no longer the threshold. A business creates nexus — a tax collection obligation — by selling enough into a state, regardless of whether it has any presence there at all.

Most states adopted economic nexus thresholds of $100,000 in annual sales or 200 transactions. That threshold is lower than it sounds. If you sell a $50 product and reach 200 customers in a state, you have nexus. You were supposed to collect tax starting with that transaction. If you did not know, you were not collecting it, and the liability accrued quietly while the business grew.

What to Do When You Find Out

Stop and audit before you do anything else. Pull your sales data by state — most payment processors and e-commerce platforms can export this. Identify which states you have sold into, what your transaction counts and revenue figures were, and what the nexus threshold is for each state. Some states have different thresholds. Some have different rules for different product categories. This is two to three hours of work with your accountant and your own data.

Most states have a voluntary disclosure program, usually called a VDA. It allows a business to come forward proactively and disclose a liability before the state finds it. In exchange, states typically limit the lookback period — often to three or four years rather than the full statute of limitations — and reduce or waive penalties. This path almost always produces a better outcome than waiting to be discovered.

Do not file voluntary disclosures on your own. The process varies by state. Some require a formal application before any filing. Some have specific forms and sequences. Some will negotiate the lookback period if you ask correctly. Your accountant or a sales tax attorney handles this. The professional fee is real and worth it.

Once you have resolved the historical liability, register in the states where you have ongoing nexus and set up collection going forward. Most payment processors and e-commerce platforms automate the calculation once you configure which states require collection. The ongoing burden is administrative, not analytical.

What the Other Version Looks Like

The version of this story where the state finds you before you find yourself is significantly more expensive. States that initiate the contact are not offering voluntary disclosure terms. The lookback period is longer, penalties apply in full, and the process is adversarial rather than cooperative.

We resolved our exposure over about three months. The liability itself was manageable because we had not been selling at scale long enough for it to be large. The professional fees for the accountant who handled the VDA filings cost more than we paid in back taxes in two of the smaller states. That ratio is uncomfortable but still far better than the alternative.

If your business has been selling online for more than a year and you have not thought about economic nexus, think about it now. The analysis takes a few hours. The exposure, if it exists, does not get smaller by waiting.