One of the most challenging taxation issues that technology companies face is sales tax. Unlike income tax, which is generally the same between federal tax and state tax, just at different rates, sales tax has a different base (some transactions may be taxable in one state but not another) for each of the fifty states and then different rates at the state and even local county levels. Further compounding this issue is the speed at which technology changes as opposed to state tax laws, which are normally years behind technological changes. Trying to fit innovative new technologies into older definitions leads to more confusion.
To start, in order to even have an obligation to charge sales tax, a company must first have a physical nexus with that state. States intentionally define “nexus” broadly and vaguely so as to not limit their tax base; however, “nexus” generally means that you have an employee or office within that space or make continued, habitual, and repeated visits to that state. As states have become more revenue-hungry, they continue to expand what constitutes nexus, including the use of independent agents or affiliates. When entering into sales contracts with consumers from a new state, a company should perform an analysis to determine if it has in fact created nexus within that state and is then required to potentially charge and remit sales tax.