Table of Contents
Key Takeaways
- Sales tax in the USA is complex, with over 13,000 jurisdictions in 2025.
- A 2018 Supreme Court ruling, South Dakota v. Wayfair, changed the way goods and services online were taxed.
- While sales tax revenue has increased, businesses must find new ways to mitigate tax liabilities when selling across state lines.
According to the Tax Foundation’s 2025 report, sales tax contributes 32% of state tax collections. As sales tax law evolved, noting each state’s sales tax rate has become important for businesses looking to remain compliant and minimize tax liabilities.
One of the most significant cases in recent years was the 2018 Supreme Court decision on South Dakota v. Wayfair. It has turned the sales tax environment upside down, and if you’ve been counting on the old physical presence rules to avoid sales taxes, you’re in for quite a ride.
Today, many states require new standards in response to the SCOTUS ruling. The complexity of the new rules has caused businesses that sell across state lines to automate sales tax calculations to ensure compliance.
In this article, we’ll cover the importance of this ruling for financial management, how this impacts financial goals for a business and finance department challenges, where we are now, and some common questions regarding sales tax.
How things used to be: The physical nexus
For decades, physical presence was the key determining factor for whether a company owed sales taxes in a particular jurisdiction. That’s due in large part to the 1992 Supreme Court case Quill Corp. v. North Dakota, in which Quill argued that it wasn’t responsible for collecting use taxes for North Dakota because it had no physical operations or employees in that state.
The Supreme Court sided with Quill in that case, ruling that businesses aren’t responsible for collecting sales or use taxes unless they have a physical presence in that jurisdiction. According to the Quill ruling, you have a physical presence in a state if your business has an office or warehouse, keeps inventory, or employs one or more residents in that state. This rule is now better known as “physical nexus.”
The physical presence nexus made it economically smart for remote sellers to choose locations that didn’t charge sales tax. For example, an e-commerce company could offer slightly better prices to its customers if it chose to keep all its warehouses and offices in Oregon, which doesn’t charge sales tax. This hypothetical e-commerce company would also have to hire only employees located in Oregon and other sales-tax-free jurisdictions or bring on freelancers if it needed staff in, say, California. Using this approach, the company would save money by not needing to invest in the tools, systems, and man-hours needed to calculate, collect, and pay sales taxes. That would permit it to shave a small percentage off its prices and thereby become more competitive or maintain its prices and enjoy a higher profit margin.
The Quill ruling was based in part on the tax complexity produced by the enormous number of sales tax jurisdictions in the USA, and things have only gotten more complicated since. In 1992, there were over 6,000 separate sales and use tax jurisdictions; by October 2017, tax software company Vertex calculated that there were nearly 11,000. In 2025, there will be 13,000.
The court supported Quill partly because it felt that requiring remote sellers to collect sales taxes for all jurisdictions in which they had transactions would have made interstate selling all but impossible, especially for smaller businesses.
The ruling that changed it all: South Dakota v. Wayfair
The Supreme Court wasn’t happy with the physical presence standard set by the Quill decision, despite the fact that sales tax jurisdictions are even more complex now than they were in 1992.
It hoped to find a new way to determine sales tax requirements that would be less arbitrary than the physical presence rule but still not place a huge burden on remote sellers. To that end, the court invited legislation that would give it a chance to revisit sales tax determination laws – and South Dakota stepped up.
In 2016, South Dakota enacted a new standard for sales tax nexus that used an economic rather than a physical requirement for businesses. Online home store Wayfair objected to the state’s new sales tax rules, and during the resulting court case, the South Dakota Sixth Judicial Court found in Wayfair’s favor. South Dakota appealed all the way up the ladder, and in January 2018, the U.S. Supreme Court agreed to hear the case.
On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair – in favor of South Dakota. The Wayfair decision found that “the physical presence rule of Quill is unsound and incorrect” as a determining factor and supported South Dakota’s new sales tax guidelines. Justice Kennedy wrote the majority opinion, commenting that:“First, the physical presence rule is not a necessary interpretation of Complete Auto’s [an earlier sales tax case] nexus requirement… Second, Quill creates rather than resolves market distortions…\ Third, Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow in favor of ‘a sensitive, case-by-case analysis of purposes and effects.’”
Kennedy noted that South Dakota’s economic nexus requirement was reasonable even for small businesses because it “requires a merchant to collect the tax only if it does a considerable amount of business in the State; the law is not retroactive; and South Dakota is a party to the Streamlined Sales and Use Tax Agreement.” He felt that these factors make the economic nexus a viable alternative despite the tangled web of sales tax jurisdictions in the U.S.
Where we are today: Economic nexus
South Dakota’s economic nexus standard set a threshold of $100,000 in sales or 200 separate transactions per year to customers within the state. That’s a fairly high threshold considering South Dakota’s relatively small population. As the Wayfair case worked its way through the judicial system, a number of other states got to work on their own economic nexus legislation, often (but not always) basing their requirements on South Dakota’s.
Economic nexus will free businesses to set up facilities wherever they choose but will force them to establish strong transaction tracking and reporting systems. Most states have already decided on their own idiosyncratic thresholds, adding a further level of complexity to tax calculations. You can consult this economic nexus chart for an up-to-date list of sales tax thresholds by state.
In 2022, the Journal of Public Economics published a study that showed that this ruling increased tax revenues by 7.9%, primarily in states with strict compliance requirements.
While it has been a net gain for state governments, businesses must bear the brunt of calculating these new taxes.
The good news is that sales tax management software has come a long way since 1992. Here are a few of the top options for businesses with substantial interstate commerce.
Managing sales tax: 3 sales tax software
For companies, there are easier ways to manage sales tax. Automated software can simplify the reporting process while ensuring compliance.
The problem for many organizations can be selecting the right sales tax management software.
The good news is that we have three recommendations based on our expertise in spend management and strategic finance:
AvaTax by Avalara
AvaTax is one of the most comprehensive sales tax software programs. It provides complete sales tax, use tax, and VAT compliance and integrates with more than 600 different ERP, e-commerce, and accounting systems. The program works through a central console and has excellent reporting options. Pricing is volume-based and starts at $50 per year, making it suitable for businesses of all sizes.
Vertex Cloud Indirect Tax by Vertex
Like AvaTax, Vertex has excellent integration with both ERPs and bookkeeping platforms such as QuickBooks; it can also be used as a standalone product. Vertex Cloud comes in three different product levels: Standard, which comes with complete rate lookup based on address; Professional, which adds some extra features such as custom scenarios and exemption certificate management; and Premium, which includes all the professional level features plus sales tax filing and payment remittance. Pricing information is only available upon request; however, the product’s base pricing is substantially higher than AvaTax’s, making it more burdensome for extremely small businesses.
TaxJar
TaxJar is designed specifically for e-commerce companies and integrates with the most popular e-commerce platforms, including Amazon, PayPal, and eBay. The program creates filing-ready sales tax reports for each applicable state and has an AutoFile option, making the sales tax return process substantially easier. TaxJar comes in Basic and Plus versions; the latter includes expanded support and account management options. TaxJar Starter starts at $17 a month for businesses with up to 1,000 transactions per month and scales up in price for higher transaction levels. Businesses with cross-jurisdictional transactions need to start preparing immediately for economic nexus. Just consider the earlier example of the Oregon-based e-commerce company. As states enact their sales tax thresholds, that company will have to scramble to set up a sales tax management system, track transactions to determine when it hits the sales tax threshold for a given state, and be able to switch to collecting sales tax on relevant transactions. It will also need to file sales tax and use tax returns with each jurisdiction. Developing and implementing all these processes is a huge burden, especially for a small company with minimal staff.
If your business sells a product or service that’s subject to sales tax in any jurisdiction, now is the time to prepare for the new sales tax environment. Study the economic nexus thresholds for states where you do business, and if you run the risk of hitting one or more of those thresholds, consider getting a sales tax management software system right away.
Assessing your options now will give your business plenty of time to establish a system and get familiar with its use before the economic nexus becomes widespread.
Common questions regarding USA sales tax and sales tax by state 2025
How much is sales tax in the USA?
There is no single sales tax rate in the United States. The sales tax ranges from 0% to 16%, depending not only on the state but the type of good or service rendered.
Which state has no sales tax in the USA?
Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a sales tax. Typically, these states will make up revenue in other tax types. For example, while Oregon does not have a sales tax, it does have an income tax.
What is the highest sales tax in the USA?
Technically, Louisiana has the highest sales tax at 9.56%. However, there are taxes on specific goods and conditions that can go much higher. For example, while Vermont has a 6% tax rate, if you buy a beer at a bar, you can expect an additional 10% alcohol tax.
Which state has the lowest sales tax in the USA?
Alaska has the lowest sales tax, at 1.82%.
Can I get a sales tax refund in the USA?
Tax refunds are available for two reasons: Accidentally paying sales tax or overpaying it. To access a refund, you will need to file a request with your state, provide proof of that tax payment, as well as a justification for a refund. Depending on your state and claim, it can take weeks or months to process.
Take your financial management to the next level
Changes in taxation can create confusion and stress as businesses adapt to the new normal. But it’s possible to stay ahead of the curve through forward-thinking initiatives, such as automating AP and reporting. Tools that streamline not only sales tax but all expenses make both state tax filing and compliance more cost-effective while reducing accounting workloads.
Teampay is a leading provider in financial management solutions, from AP automation to procurement approval and corporate cards. Discover how automation can lead to growth in our on-demand webinar or book a demo to experience the Teampay difference.
