The 2025 State of Internet-Based Taxation in the United States… is Ridiculous

If you sell anything online in the US, you are operating inside a tax system that was never designed for frictionless, borderless commerce. The result is a compliance landscape that is both mature (nearly every state has caught up to e-commerce) and still deeply fragmented (rates, rules, definitions, and filing mechanics differ by jurisdiction). For platforms, marketplaces, SaaS companies, subscription services, and any business selling to customers in multiple states, the hardest part is not the concept of sales tax. It is determining where you owe it, what is taxable, which rate applies, who is responsible for collecting it, and how to prove you did it correctly during an audit.

The Wayfair Supreme Court Decision

This ridiculous era began with the Supreme Court’s 2018 South Dakota v. Wayfair decision, which validated economic nexus rules. In plain terms, states could require out-of-state sellers to collect and remit sales tax based on economic activity in the state, rather than on physical presence. South Dakota’s model law—often referenced because it was designed to look administrable—used a threshold of $100,000 in sales or 200 transactions. 

Since then, the internet sales tax question has largely been answered in practice: every state with a general sales tax now has an economic nexus regime for remote sellers (even though the details vary). The Sales Tax Institute maintains a state-by-state economic nexus chart and notes this reality explicitly. 

That sounds like simplification. In practice, it expanded the compliance perimeter for thousands of businesses that previously only collected tax in a handful of states. The question is no longer Do I have nexus? but At what point do I trigger obligations, and how do I manage them across dozens of jurisdictions with changing rules?

Thousands of Jurisdictions, Not 50 States

A common misconception is that sales tax is a state tax. In many states, it is also a local tax—counties, cities, special districts—stacked on top of the state rate. That design matters online because the correct rate is typically determined by sourcing rules (often destination-based for remote sales), meaning the buyer’s location can drive the tax rate and sometimes the taxability.

On the scale question, Avalara summarizes the jurisdiction problem succinctly: the U.S. has more than 12,000 sales tax jurisdictions, each potentially influencing rates and administration.  That number alone explains why just charge the right sales tax turns into address validation, rooftop-level geocoding, boundary logic, and constant updates.

This is also why internet-based taxation is not only a payment or checkout issue. It bleeds into product catalogs (taxability mapping), customer records (exemption handling), billing systems (subscriptions, proration, credits), and finance operations (filing, remittance, reconciliation).

Economic Nexus Thresholds

In the first wave after Wayfair, many states converged around the South Dakota-style thresholds ($100,000/200 transactions). Over time, states have increasingly viewed transaction-count thresholds as noisy and burdensome—especially for low-dollar, high-volume sellers—and many have removed them.

Avalara reports that as of July 1, 2025, 15 states (including South Dakota) had eliminated the 200-transaction threshold, shifting the trigger more toward revenue-based thresholds. This helps some businesses (fewer surprise registrations from tiny transactions), but it also means you cannot rely on a single mental model. You have to track each state’s current rule set and effective dates.

Laws Moved Collection to Platforms, But Didn’t Eliminate Seller Complexity

One of the most significant structural changes of the last several years is the rise of marketplace facilitator statutes. These laws generally require marketplaces (think large platforms that process payments and facilitate third-party sales) to collect and remit sales tax on behalf of third-party sellers for marketplace transactions.

For sellers, this can reduce filings in states where sales occur only through marketplaces. For platforms, it raises the operational bar dramatically because they become the tax collector of record for millions of transactions across multiple product categories and jurisdictions. The Streamlined Sales Tax Governing Board maintains state guidance and summary information on marketplace facilitator requirements, reflecting the widespread and formalized nature of these rules. 

But facilitator laws do not solve compliance for many businesses. A brand might sell through its own Shopify site and through marketplaces. It may have wholesale channels, returns processed differently by channel, mixed carts containing taxable and exempt items, or product bundles that change tax treatment. The practical outcome is often a more complex split-brain model: some transactions are handled by the marketplace, others by the seller, and the business must still maintain clean records and understand residual obligations.

Digital Goods and SaaS Taxation Is Messy

Physical goods are comparatively straightforward: most are taxable, with familiar exemptions (groceries, clothing, medical items) varying by state. Digital products and services are where definitions fracture.

Consider SaaS. Depending on the state, SaaS might be treated as a taxable digital product, a taxable service, a non-taxable service, or taxable only under specific conditions (such as when software is downloaded or when the product is categorized as an information service). Stripe’s overview highlights the inconsistency: 25 states tax SaaS services, and an additional seven states tax SaaS in certain download required situations, with states reaching these outcomes through different legal reasoning. 

That variation creates two operational challenges that physical-product sellers often don’t face in the same way:

• Product classification becomes a legal exercise, not a merchandising exercise. Two companies can sell software that looks similar to a customer, but is taxed differently because one is characterized as data processing, another as information services, and another as access to prewritten software.
• Bundling and packaging can change taxability. If you bundle software with taxable implementation services, hardware, or support, some states treat the bundle as a single taxable unit unless you separately state prices and meet documentation requirements.

Filing and Audit Exposure Are Part of the Burden

Even when you correctly calculate tax at checkout, you still have to file and remit—often monthly or quarterly—potentially across many states. Every state’s revenue department has its own portal, return formats, rounding rules, penalty regime, and quirks in interpretation. Add local jurisdictions, communications taxes, and industry-specific fees, and you can end up with dozens of distinct filing obligations that don’t consolidate neatly.

The U.S. Government Accountability Office has described the cost categories that remote sellers face when complying with multistate sales tax collection—software-related costs, audit and assessment costs, and costs associated with research and liability—and confirms that businesses incurred costs in these categories as they took steps to comply with the post-Wayfair environment. 

This is why tax compliance is not just a checkout feature. It is a governance and risk function. When rules vary, mistakes are easy, and audits are the mechanism states use to enforce compliance, defensible processes and documentation become as crucial as tax calculation itself.

What is it costing businesses?

There is no single universally accepted figure for the cost of internet sales tax compliance because costs vary dramatically by size, footprint, product type, and channel mix, and because many studies measure tax compliance broadly rather than isolating sales tax for online sellers.

That said, there are two useful ways to ground the magnitude:

• The Tax Foundation estimates that tax complexity costs the U.S. economy over $536 billion annually, reflecting time and resources devoted to compliance rather than productive activity.  While this is not limited to e-commerce sales tax, it provides important context: the compliance burden created by complex rules is large enough to measure at a national scale.
• For online sellers and platforms, the GAO framing is practical because it maps to real budget lines: tax engines and address validation, exemption certificate systems, internal tax staff or external advisors, registrations and filings, and the time cost of monitoring changes and handling audits. 

In many organizations, the internet tax cost is not a single invoice. It is an accumulation of software subscriptions, accounting time, customer support friction (tax-exempt buyers, refunds, disputes), engineering effort, and risk management.

Why the Complexity Persists

The U.S. does not have a national VAT and does not administer sales tax at the federal level. States are sovereign tax administrators with their own definitions and political incentives. Even within a state, local jurisdictions may have authority to impose rates or special district taxes. Technology enables calculating a rate for any address. Still, it does not eliminate the underlying legal diversity: what is taxable, how it is sourced, who the seller of record is, and what documentation is required.

Streamlined Sales Tax efforts help in participating states, but participation is not universal, and many of the hardest issues today sit outside rate calculation: marketplace models, digital services, bundling, exemptions, and audit posture. Wisconsin’s Department of Revenue, for example, notes there are 23 full member states and one associate member in the Streamlined Sales and Use Tax Agreement as of August 2025—meaning a substantial share of the country remains outside that framework. 

The State of Internet Taxation in 2025

A realistic posture is to treat tax as a living system rather than a one-time setup. That means monitoring nexus thresholds and effective dates, maintaining a defensible product taxability matrix (especially for SaaS and digital services), clearly defining seller-of-record responsibilities across marketplaces and channels, and designing billing/refund flows that preserve tax accuracy. It also means preparing for audits as a normal cost of operating at scale, not a rare disaster.

A useful way to summarize the state of play is this: the U.S. has broadly succeeded at collecting tax on remote commerce after Wayfair, but it has done so by extending a highly decentralized tax structure into the online world rather than replacing it with a unified model. The system works, but it remains complex—especially for the exact kinds of businesses that power modern internet commerce: platforms, subscription services, and multi-channel sellers.