What Are the Key Challenges Businesses Face in Sales Tax Compliance, and How Can They Be Addressed?

< Back to Q&A

Sales tax compliance has become increasingly complex, especially after the 2018 South Dakota v. Wayfair decision, which allows states to tax remote sellers. Trade policies like Section 301 and tariffs further complicate cross-border transactions and costs. With thousands of state and local tax jurisdictions, each with unique rules and filing requirements, businesses often struggle to stay compliant. Addressing these challenges requires a proactive approach that combines automation, monitoring, and professional expertise. Below are the most common pain points businesses encounter and how they can be effectively managed.

1. Navigating Multi-State Nexus Rules

The expansion of economic nexus rules has been one of the most significant shifts in state tax administration since Wayfair. Businesses are now required to collect and remit sales tax in states where they have exceeded certain sales or transaction thresholds, even without a physical presence. While many states have adopted a $100,000 sales or 200-transaction threshold, the specifics vary widely. According to the National Conference of State Legislatures (NCSL), 45 states and the District of Columbia have enacted economic nexus laws, each with unique filing and registration requirements.

Manually tracking these thresholds can be challenging, particularly for businesses selling across numerous states. Automated tracking systems and integrated accounting tools can help monitor real-time sales activity, alerting businesses when nexus obligations are triggered to ensure timely compliance and registration.

2. Marketplace Facilitator Regulations

The rise of online marketplaces has led most states to enact “marketplace facilitator” laws that require platforms such as Amazon or Etsy to collect and remit sales tax on behalf of third-party sellers. While this relieves sellers from certain collection duties, it also creates new recordkeeping obligations. Sellers must still ensure that all transactions are properly documented and that filings align with the marketplace’s tax reporting.

To avoid discrepancies, businesses should maintain clear communication with marketplace operators, verify where facilitator laws apply, and reconcile marketplace data against their internal accounting systems regularly. This level of diligence helps prevent underreporting or double-reporting of sales.

3. Keeping Up with Changing Tax Laws and Rates

Sales tax rates and product taxability differ dramatically across jurisdictions, with thousands of state, county, and local combinations nationwide. Beyond rate variations, the taxability of specific products such as software, digital goods, or professional services can also differ from one state to another. A product that is taxable in one jurisdiction may be exempt in another, making manual compliance nearly impossible for businesses operating in multiple markets.

To address this challenge, companies should leverage sales tax compliance software that automatically maintains  updated rate databases and applies jurisdiction-specific rules automatically at the point of transaction. These systems not only improve accuracy but also reduce the administrative strain associated with manual lookups and data entry.

4. Managing Sales Tax in Multi-state Operations

Multi state sales tax compliance creates significant administrative overhead. Each state has its own registration process, filing frequency, and audit procedures.  Many businesses have had to increase their administrative budgets or invest in additional staff just to handle filing requirements across states. The risk of audit exposure also grows with every new state a business operates in. Penalties for late filings or inaccurate returns can accumulate quickly, and audits often require detailed documentation of every taxable and exempt transaction.

To mitigate these risks, companies can engage in sales tax compliance outsourcing with professional advisors who specialize in State and Local Tax Issues. Outsourcing allows businesses to leverage expert knowledge, reduce internal workload, and ensure consistent filing accuracy across jurisdictions.

5. Cross-Border and International Considerations

Global expansion introduces another layer of complexity as businesses encounter foreign tax systems such as Value Added Tax (VAT) or Goods and Services Tax (GST). Many countries now apply similar “economic nexus” principles to remote sellers, requiring registration once specific thresholds are met. For companies with both domestic and international customers, maintaining compliance across jurisdictions can be especially demanding.

Integrating global tax compliance solutions and seeking guidance from international tax professionals helps businesses stay aligned with evolving cross-border requirements and minimize the risk of non-compliance.

6. The Role of Automation and Expert Oversight

Given the pace of regulatory change, relying solely on manual processes is no longer sustainable. Implementing sales tax automation toolssuch as those offered by providers like Avalara can help businesses streamline rate calculations, manage nexus tracking, and automate return filings. However, technology alone is not a substitute for professional insight. Pairing automation with ongoing oversight from tax advisors provides both efficiency and strategic compliance assurance.

This dual approach allows businesses to focus on core operations while ensuring that their sales tax processes remain accurate, timely, and aligned with jurisdictional rules.

Conclusion

In today’s environment, sales and use tax compliance requires businesses to manage a constantly shifting landscape of rules, rates, and jurisdictions. The main challenges such, as multi-state nexus monitoring, product taxability differences, marketplace coordination, administrative complexity, and international obligations, can all be addressed through a proactive compliance strategy.

Implementing robust technology, leveraging expert outsourcing, and maintaining awareness of regulatory changes are key to staying ahead. With automation, professional guidance, and sound internal processes, businesses can turn sales tax compliance from a daunting obligation into a manageable, efficient part of operations. This approach supports growth while maintaining full compliance with state and federal tax authorities.

Back to Q&A