Blog 1: California Reverses Course on SaaS taxability position - From Silicon Valley to Sales Tax: Understanding California SB 122
The day has finally come: signed into law on June 29, 2026, SB 122 declares that “digital products” will be taxable as tangible personal property in California effective January 1, 2027. As the technology industry rapidly expanded in the past decade, California’s booming tech ecosystem benefited greatly from the state’s long-standing position that purchases and sales of software delivered electronically, such as prewritten code downloaded to a user’s device or accessed in a browser, is not subject to sales tax. Additionally, the term “Software as a Service,” also known as SaaS, was not a “retail sale of tangible personal property” and therefore not subject to California sales tax.
This era now ends with the passage of SB 122. SB 122 redefines how and when cloud-delivered software will be taxable in the state. If your company offers services relatively similar to those discussed, continue reading these key impacts and strategic considerations for SaaS providers, or reach out to us at info@milesconsultinggroup.com.
Why California and Why the Cloud?
The concept of digital products' taxability is murky and changes from state to state. Under SB 122, Sec. 8, 6010.9. (a), the rule clarifies that “sale” and “purchase” do not include the design, development, writing, translation, fabrication, lease, or transfer of custom computer software (other than a basic operating system). SB 122, Sec. 8, 6010.9(b) defines key terms: a “computer” is any programmable electronic device with a CPU and memory; “computer software” is a set of coded instructions that directs such devices to perform tasks; and “custom computer software” is software specially ordered or modified for a single customer (excluding off-the-shelf products, except to the extent they are actually modified for that customer). SB 122, Sec. 10, 6016.1(a) defines a “Digital product” to include computer software transferred electronically or accessed remotely. SB 122, Sec. 10, 6016.1(b) states that digital books and digital video games, among other items, are not included in the definition of “digital products.”
As more states, under revenue pressure, expand their rules to tax cloud services, California faces a choice: keep cloud services non‑taxable and risk further budget strain and tax base erosion, or begin taxing cloud services and close what some may view as an unfair loophole.
Some of our readers may remember a time (not so long ago), when software was delivered via floppy disks or CDs that were shipped to consumers, which in California changed the sale from intangible to tangible and an obvious taxable transaction. The shift over the years to purely electronic delivery creates the ambiguity between nontaxable “services” and taxable “goods.” California regulators and courts generally leaned toward the exclusion of SaaS, with the resulting loss of revenue as the SaaS industry increases in operation.
The landmark administrative action that codifies SB 122 became a more serious discussion in late 2024, when the California Department of Tax and Fee Administration (CDTFA) opened a rulemaking proposal to redefine “tangible personal property” to include prewritten software accessed remotely.
How SB 122 Affects Technology Businesses
Software as a Service, digital products, and electronically delivered software (“EDS”) sold in California will now be subject to sales and use tax. Under Section 6, 6010.5. (b) (2), the provision states that the sourcing of electronically delivered digital products to the seller’s own in-state location whenever the sale is conducted in person at a site where the seller must hold a California seller’s permit (essentially a sale from a brick and mortar location). Otherwise, sales are sourced based on the following hierarchy:
- The purchaser’s billing address
- The purchaser’s shipping or delivery address
- The mailing address associated with the purchaser’s payment instrument
- The purchaser’s most recent mailing address
These services become part of the taxable measure, subject to the full 7.25 percent state rate and any local district taxes. SaaS vendors must now register in California, file returns, and remit the tax to CDTFA at the appropriate filing frequency, whether that be monthly, quarterly, or annually.
Will This Change Affect Nexus Thresholds?
The short answer is ‘Yes’. Remote sellers that meet the economic presence test in California, $500,000 of sales of tangible personal property (“TPP”) annually in the previous or current calendar year, must register and begin collecting as of January 1, 2027. SB122 has now expanded this threshold to include sales of digital goods and prewritten software.
Under Section 12. 6052. (a) (1) (A), sellers with over $5 million in annual sales of taxable digital products are relieved of collection duties, provided the purchaser holds a California Use Tax Direct Payment Permit. A “direct payment permit is “a permit issued by the board that allows a use tax direct payment permit holder to self-assess and pay state, local, and district use taxes under Part 1 (commencing with Section 6001), Part 1.5 (commencing with Section 7200), and, if applicable, Part 1.6 (commencing with Section 7251) directly to the board.” Under regulation 1699.6(a).
How to Incorporate SB 122 into Your 2027 Strategic Planning
To prevent any compliance mishaps, consider implementation of the following steps in your 2027 strategy:
- System readiness: Update billing and ERP systems to support California requirements.
- Geo-tracking and customer data to substantiate sourcing decisions.
- Consider the pricing and packaging revisions on your services for taxability.
- Begin the conversations with your customers now, before the updates are made in contracts.
- Monitor ongoing monitoring and compliance
In summary, this is a major change for California and will impact companies and consumers widely. In the next few months leading up to January 1, we will continue to share updates and filing nuances as companies grapple with the impact to their budget, systems, marketing, etc.
Also, stay tuned for the next update in this new series: Taxing the Cloud: State by State. Next up in our blog mini-series: Colorado! Until then, please reach out to us at info@milesconsultinggroup.com with any questions.
Washington's B&O tax and Chicago's lease tax changes: what SaaS finance leaders should do now
If you manage finance for a SaaS company, the last six months brought a lot to keep up with. Washington expanded its sales tax base on October 1, 2025. Chicago raised its Personal Property Lease Transaction Tax from 11% to 15% on January 1, 2026. Maryland added IT services to its sales tax base last summer. Maine added digital audio and audiovisual services at the start of this year.
Each shift matters in a different way for SaaS companies, and the more useful question isn't what changed, but what your team should be doing in response. Washington and Chicago carry the most weight for most SaaS providers, so we'll start there.
Key takeaways: what these changes mean for SaaS
- Washington's ESSB 5814 expanded what's taxable, including custom software and the customization of pre-written software. If you sell into Washington, your existing contracts and your billing flows likely both need a fresh look.
- Chicago's lease tax is now 15%, and it applies based on where your customer uses the service. SaaS providers headquartered anywhere in the country can owe this. Even a modest Chicago customer base creates real exposure if registration isn't current.
- The trend is base expansion, not rate increases. Your sales tax footprint will keep shifting even when your business doesn't change, so map it on a schedule rather than reacting to headlines.
- Audit attention rises when states have budget pressure, even where the underlying laws don't change. Current documentation matters more than predicting which state moves next.
What Washington's B&O tax changes mean for your SaaS company
If you sell SaaS into Washington customers, three things shifted in October 2025 that warrant your team's attention.
First, ESSB 5814 expanded what counts as a "retail sale." Custom software, customization of pre-written software, IT services, advertising, and a broader category of digital automated services are now subject to sales tax. The Washington Department of Revenue's services page has the full list.
Second, contracts signed before October 1, 2025 may qualify for transitional relief. Current Washington Department of Revenue guidance indicates the transition extends into early 2026 for many existing arrangements, but eligibility depends on the contract terms. Multi-year SaaS deals with Washington customers warrant a careful read against the interim guidance.
Third, the 2025-2027 budget added a 0.5% B&O surcharge on taxable income above $250 million, effective January 1, 2026. That mostly affects larger providers, but it's worth flagging if your group's parent revenue puts you near the threshold.
Here are three actions your team can take to check your Washington tax position.
First, review your Washington customer contracts to identify which may qualify for transitional relief.
Next, update billing and tax engine logic to reflect the expanded retail sale definition.
Finally, check how your customization services are classified. We covered the full Washington package in our November 2025 update for teams who want the deeper detail.
If you're unsure whether your existing Washington contracts qualify for transitional relief, that's exactly the kind of focused review we can run for you in a short engagement. Get in touch and we'll walk through your contracts.
What Chicago's lease tax means for your SaaS company
Chicago's Personal Property Lease Transaction Tax moved from 11% to 15% on January 1, 2026. That's the second consecutive annual increase; the rate had already moved from 9% to 11% the previous year.
As a home rule city, Chicago taxes access to cloud-hosted software as a non-possessory computer lease, even though Illinois doesn't tax SaaS at the state level. The trigger is the customer's location, not the seller's. A SaaS provider headquartered anywhere in the country can have a Chicago lease tax obligation if its customer uses the software in Chicago.
A four-percentage-point rate increase isn't trivial for a SaaS company with even a modest Chicago customer base. It changes your effective price in that market, complicates billing if you previously absorbed the tax, and creates audit exposure if your registration isn't current.
Here are some practical questions for your team to check your Chicago tax position.
First, how much of your revenue runs through Chicago customers?
Next, who's responsible for absorbing or passing on the new rate?
Finally, is your registration up to date? We walked through the mechanics of the Chicago PPLTT in our PPLTT explainer.
The bigger pattern: bases are expanding, not rates
Step back from Washington and Chicago and the broader pattern is hard to miss. State legislatures aren't raising headline sales tax rates that much. They're broadening what counts as taxable.
Maryland added IT services at 3% in July 2025. Maine added digital audiovisual and digital audio services on January 1, 2026. Streaming services, software subscriptions, advertising, and data processing have moved into more states' tax base over the last few years. The Tax Foundation's 2026 state tax data describes the same pattern.
The reason behind it is more practical than ideological. Sales tax bases were originally designed for an economy of physical goods, and as consumption has shifted to services and digital products, those bases haven't kept pace with state spending needs. Expanding the base is also less politically visible than raising the rate, which makes it the path most legislatures pick.
For SaaS companies, the question of where sales tax on SaaS applies in your footprint will keep moving. The state where you launched might still treat your service as exempt, while a state your customer just relocated to might not.
When budgets tighten, audit attention follows
State budget pressure tends to show up in audit activity before it shows up in legislation. We see it in the questions auditors ask: more notices, closer scrutiny of how products are classified, more probing on whether old nexus determinations still hold up. A SaaS company that has filed the same way in Washington or Illinois for three years might find the questions in 2026 are sharper than the questions were in 2023, even if its own operations haven't changed.
Ensure your documentation is up-to-date: nexus studies, taxability decisions, and exemption certificates need to be current, not three years old. The companies that struggle in a sales tax audit are usually the ones reconstructing decisions made years earlier without a clear record of why. We covered this in our strategic guide on sales tax audit defense for finance leaders.
If your last nexus review was more than 18 months ago, that's the gap worth closing first. Talk to us about a focused refresh rather than a full study from scratch.
A sustainable response: build a system that absorbs the change
The companies that handle this well don't try to predict each new law; they keep their compliance work current so that new laws are a small adjustment rather than a fire drill. Four habits, in our experience, separate the ones who stay ahead from the ones who keep getting surprised.
Run regular taxability reviews. Are your products classified correctly under each state's current rules? This matters most when a state changes its definitions, as Washington did this past fall.
Maintain monitoring discipline. Either your tax team tracks state Department of Revenue alerts, or you delegate that work to a consultant. Most SaaS finance teams don't have the capacity to read every state revenue ordinance themselves.
Treat audit-readiness as a baseline, not a project. Documentation is key here; the companies that struggle in a sales tax audit are usually rebuilding decisions made years earlier without records.
Schedule periodic compliance check-ins. For a multi-state SaaS company over $10 million in revenue, an annual review of your sales tax footprint is reasonable. It catches drift before it becomes exposure. Add a check-in whenever you launch a product, enter a new state, or change pricing.
State sales tax changes will keep coming because state budgets keep rising and the digital economy keeps growing. Washington's B&O changes and Chicago's lease tax are today's headlines; something else will be the headline in six months. Treat this as ordinary operational work and the headlines stop being a problem.
Ready to take stock of your state tax footprint?
If your team is trying to make sense of how Washington's B&O changes, Chicago's lease tax, or other recent state shifts affect your specific footprint, we'd welcome a conversation. Contact Miles Consulting Group at info@milesconsultinggroup.com or book a consultation through our website.
Frequently asked questions
What changed in Washington's B&O tax in 2025-2026?
Washington's 2025-2027 budget includes a 0.5% B&O surcharge on taxable income above $250 million effective January 1, 2026, alongside increases to the advanced computing surcharge and the financial institutions surcharge. ESSB 5814 separately expanded the retail sales tax base to capture custom software, customization services, IT services, advertising, and a broader category of digital automated services. Most SaaS companies will feel the sales tax expansion before the B&O surcharge.
Is SaaS taxable in Chicago, and what is the Chicago PPLTT?
Yes. Chicago's Personal Property Lease Transaction Tax (PPLTT) treats access to cloud-hosted software as a non-possessory computer lease and taxes it at 15% as of January 1, 2026. Illinois doesn't tax SaaS at the state level, but Chicago does, based on where the customer uses the service. A SaaS provider with no physical Chicago presence can still owe the lease tax on its Chicago customers' usage.
How does the Washington existing-contract transition work for SaaS providers?
Contracts signed and executed before October 1, 2025 may qualify for transitional relief on the new collection requirements, with current guidance indicating the transition extends into early 2026 for many existing arrangements. The Washington Department of Revenue has issued interim guidance, and SaaS providers with multi-year deals should check their specific contracts against that guidance to confirm eligibility.
Will state tax audits get tougher in 2026?
States facing budget pressure tend to scrutinize existing taxpayers more closely, even where the underlying laws haven't changed. That can mean more sales tax audit notices, more questions about product classification, and closer attention to whether nexus determinations still hold up. Keeping documentation current is more useful than trying to predict which state will ask first.
How often should a multi-state SaaS company review its sales tax footprint?
For a SaaS company over roughly $10 million in revenue with customers across multiple states, an annual review is a reasonable baseline. Schedule additional check-ins when you launch new products, enter new states, change pricing structures, or pass thresholds that might trigger new nexus.
Who Collects and Remits Sales Tax When You Sell through a Marketplace Platform?
Every U.S. state with a sales tax now has a marketplace facilitator law. Most have had them for several years. Yet many sellers and platforms still misunderstand exactly where their responsibilities begin and end, especially in mixed-channel scenarios. The South Carolina Supreme Court's March 2026 ruling against Amazon, which we get to shortly, is a current reminder that states are still working through edge cases, even on transactions that happened a decade ago.
This is a plain-language guide to who collects sales tax, who files, and where the practical gaps still are.
Key takeaways: marketplace facilitator sales tax
- Every state with a sales tax has a marketplace facilitator law, but thresholds, definitions, and seller obligations vary widely.
- When you sell a product or service through a marketplace platform and that marketplace facilitator collects on your behalf, you typically still owe sales tax on direct (non-marketplace) sales and may need to maintain registrations.
- Inventory programs like Fulfillment by Amazon can create physical nexus in states the seller never chose.
- A March 2026 South Carolina Supreme Court ruling shows that historical questions about marketplace responsibility are still being litigated.
What a marketplace facilitator is, and isn't
A marketplace facilitator is a business that lists third-party sellers' products on a platform, processes payments, and connects buyers with those sellers. The familiar examples are Amazon, Etsy, eBay, and Walmart Marketplace.
A hosted store provider isn't the same thing. Shopify, WooCommerce, and Wix give sellers tools to run their own stores; they don't broker the transaction in the way a marketplace facilitator does. The marketplace facilitator definition matters because the legal collection obligation only attaches to entities that meet it.
The line gets blurry in some cases. Payment processors, drop-shippers, and certain SaaS-driven storefront platforms can fall in between. State definitions vary, and some are broader than others. We've covered the foundational questions in our marketplace facilitator overview.
Who is responsible for what when a marketplace is involved
Once a marketplace facilitator hits a state's collection threshold, the platform is responsible for collecting, remitting, and reporting sales tax on the transactions it facilitates into that state. The seller's compliance burden shifts but doesn't disappear.
For sellers, the practical reality is more nuanced than "the platform handles it." If you have nexus in a state from sources other than the marketplace (your own website, a physical location, employees, or inventory in a fulfillment center), you may still need a current sales tax permit and may be required to file periodic returns even if you owe no tax for a given period. You owe sales tax on direct sales outside the marketplace: your own ecommerce site, trade shows, B2B direct relationships. Documentation matters; if a state audits you, separating marketplace-facilitated sales from direct sales is your responsibility, not the marketplace's.
For the platform itself, the obligations are heavy but well-defined. Some states allow contractual reallocation of collection responsibility between the platform and large sellers, with thresholds varying by state, while others (Iowa, for example) explicitly prohibit it. Home rule cities and special districts can layer additional collection obligations on top of state rules. Some states impose customer notification or reporting requirements as alternatives.
We've worked through these distinctions in our piece on the most pressing marketplace facilitator questions.
Marketplace nexus and where the gaps still are
The headline rules are clear enough, but as the Tax Foundation has noted, the state-by-state patchwork creates real complexity. These are the issues we see most often.
The mixed-channel seller. A SaaS or product company that sells through both Amazon and its own website often handles the Amazon side correctly and the direct side incorrectly. The platform's collection covers Amazon transactions, but direct sales create their own nexus and require their own registrations and filings. Selling on Amazon and assuming sales tax is fully covered is one of the most common errors we encounter.
FBA-driven physical nexus. A seller using Fulfillment by Amazon may have inventory stored in warehouses in states they didn't select. That can create physical nexus separate from the marketplace question. Amazon collects sales tax on FBA sales because the marketplace facilitator law obligates it to. But the seller's own nexus footprint, for direct sales into those same states, can still trigger registration and filing requirements.
Home rule and special-district rules. Marketplaces collect state-administered sales tax. They often don't collect city-level taxes like Chicago's PPLTT, certain Colorado home rule rates, or some Alabama local variations. If you sell into those jurisdictions, the gap is yours.
Digital products and SaaS through marketplaces. Some state facilitator laws explicitly cover digital goods and SaaS; others were written for tangible personal property and never updated. If you sell digital products through a marketplace, don't assume the platform has handled it.
Older periods. The Amazon-South Carolina case is a current illustration. On March 18, 2026, the South Carolina Supreme Court ruled 3-2 that Amazon was liable for $12.5 million in uncollected sales taxes for the first quarter of 2016, before the state's marketplace facilitator law took effect in 2019. The court found that Amazon's level of control over third-party transactions made it engaged in the business of selling under the existing 2011 statute. The practical takeaway is that historical periods can still come back into scope when a state sees uncollected revenue and existing statute language it can use. According to the South Carolina Department of Revenue, the ruling's implications could pull in further amounts across pending cases.
The only U.S. states without a state-level sales tax are Oregon, Montana, New Hampshire, Alaska, and Delaware. Alaska is a partial exception: there is no state sales tax, but many municipalities collect through a centralized arrangement (ARSSTC) that does include marketplace rules. Everywhere else, a marketplace facilitator law is in force.
Practical guidance: don't assume the platform handles everything
For sellers: run a current nexus check that separates marketplace from direct sales and captures FBA inventory locations. Confirm permits and filings in every state where you have nexus, regardless of whether sales there were marketplace-facilitated. Keep clean documentation of which sales fell under each category, because audit defense requires it.
For platforms: confirm registration and threshold tracking in every taxable state plus relevant home rule cities. Document your sourcing logic, especially for digital products and SaaS where state rules are still inconsistent.
For both, when in doubt, get a review. We covered the broader compliance picture in our overview of states' online sales tax and marketplace facilitator rules, and our sales tax compliance services cover the work end-to-end.
Marketplace facilitator laws were supposed to simplify sales tax, and for the most part they have. But the gaps are real, and the Amazon-South Carolina ruling is a reminder that states are still testing the boundaries.
Ready to map your obligations under marketplace facilitator laws?
If you're a seller or a platform trying to understand your specific exposure under marketplace facilitator laws, we'd welcome a conversation. Contact Miles Consulting Group at info@milesconsultinggroup.com or book a consultation through our website.
Frequently asked questions
What is a marketplace facilitator?
A marketplace facilitator is a business that lists third-party sellers' products on a platform, processes payments, and connects buyers with sellers. Amazon, Etsy, eBay, and Walmart Marketplace are common examples. State definitions vary, and the line between a marketplace facilitator and other commerce platforms (like hosted store providers) is sometimes blurry.
Do I still need to file sales tax returns if Amazon collects on my behalf?
Often, yes. If you have nexus in a state from sources other than the marketplace, such as your own ecommerce site, a physical location, employees, or FBA inventory, you typically need to maintain your sales tax permit and file returns. In many states, that includes filing zero returns or non-collecting reports for periods when all your sales in the state ran through the marketplace.
Does Fulfillment by Amazon create sales tax nexus in additional states?
Inventory stored in Amazon's fulfillment centers can create physical nexus in those states, separate from any economic nexus the marketplace itself has triggered. Amazon collects sales tax on the marketplace transactions, but your separate nexus from inventory can affect direct sales and registration obligations. FBA sellers should map their inventory locations and review their filing obligations regularly.
Are digital products and SaaS covered by marketplace facilitator laws?
It depends on the state. Some marketplace facilitator laws explicitly cover digital goods and SaaS; others were written for tangible personal property and haven't been updated. If you sell digital products through a marketplace, check the specific rules in each state where you have customers rather than assuming the platform has handled it.
Which states don't have marketplace facilitator laws?
Oregon, Montana, New Hampshire, Alaska, and Delaware don't have a state-level sales tax, so there is no state marketplace facilitator law to comply with. Alaska's municipalities collect sales tax through a centralized arrangement (ARSSTC), and that does include marketplace rules. Every other U.S. state has a marketplace facilitator law in force.
Maryland & Rhode Island Sales Tax: SaaS, Software & Digital Goods
Get ready to unlock the secrets of sales tax in the heart of the Northeast! This month, we’re diving into a head-to-head spotlight on Maryland and Rhode Island, where cutting-edge tech meets tax code. From Software as a Service (SaaS) in the cloud to prewritten and custom software, and every digital download in between, discover how each state treats sales tax on your tech investments.
Wait! Already know you need help with Maryland or Rhode Island issues? Please reach out to us at info@milesconsultinggroup.com
Sales Tax Holidays, Digital Goods & SaaS
Maryland offers two annual tax-free events. “Shop Maryland” Energy Weekend in February exempts qualifying Energy Star products and solar water heaters with no price restrictions. Tax-Free Week in mid-August (Sunday–Saturday) exempts clothing and footwear priced at $100 or less and backpacks (first $40 exempt). Rhode Island does not offer statewide sales tax holidays in 2026.
There's no local sales tax in Maryland, so the temporary exemptions apply only to state sales tax. The tax-free weekend for qualifying Energy Star products and solar water heaters starts at 12:01 a.m. on the Saturday immediately preceding the third Monday in February and ends at 11:59 p.m. on the third Monday in February. The August tax-free week begins at 12:01 a.m. on the second Sunday in August and concludes at midnight on the following Saturday.
Both states tax electronically delivered digital products and cloud computing services including SaaS. In Maryland, all digital products and cloud computing services are subject to sales tax. Based on the end user, sales tax is imposed at a reduced rate in Maryland. Sales of software purchased or licensed solely for commercial purposes are subject to a reduced rate. In Rhode Island, SaaS and prewritten software delivered electronically are taxable; custom software remains exempt when delivered electronically.
| Product/Service | Maryland | Rhode Island |
| SaaS & Cloud Computing | Taxable | Taxable |
| Prewritten Computer Software | Taxable | Taxable |
| Custom Computer Software | Taxable (effective July 1, 2025) | Exempt (electronically delivered) |
| Digital Goods (e-books, music, video) | Taxable | Taxable |
Economy & Fun Facts
Maryland’s economy thrives on defense, biotech, and federal research, with over 400 biotech firms, major military installations, and administrative work tied to Washington, D.C. Commercial fishing on the Chesapeake Bay supports tourism and local industries. Rhode Island, once a textile powerhouse, now leans on services (healthcare, education), advanced manufacturing (submarines, shipbuilding), and financial services (CVS Caremark, Citizens Financial), with tourism and healthcare as its largest employers.
Fun Facts:
- Maryland’s Mount Clare Station (1830) was America’s first railroad station.
- Rhode Island is the smallest U.S. state and the first colony to renounce British rule (May 4, 1776).
- Annapolis served as U.S. capital (Nov 1783–Aug 1784) under the oldest continuously used U.S. capitol building.
- Rhode Island has no county governments. It is divided into 39 municipalities each having its own form of local government.
Frequently Asked Questions
Is SaaS taxable in both states? Yes. Maryland and Rhode Island both impose sales tax on SaaS and cloud computing services. However, Maryland imposes a reduced rate when sold for commercial purposes.
When does custom software become taxable in Maryland? Custom computer software delivered electronically became taxable on July 1, 2025.
Are digital products ever exempt? No. Digital goods such as e-books, downloaded music, and streaming video are taxable in both Maryland and Rhode Island.
What qualifies for Maryland’s Tax-Free Week? Clothing and footwear priced at $100 or less (fully exempt) and backpacks/bookbags (first $40 exempt) every mid-August.
Does Rhode Island offer any sales tax holidays? No. Rhode Island does not have sales tax holidays for 2026.
For personalized guidance on Maryland, Rhode Island, or other state tax rules, contact Miles Consulting Group at info@milesconsultinggroup.com.
Why your sales tax checklist isn't enough: what M&A advisors need to know about due diligence
You're advising a client through an exit. The due diligence checklist comes out, and somewhere between insurance policies and employee agreements, there's a line about sales tax. You ask your client: "Do you think you have your sales tax handled?" They say yes. You check the box and move on.
That answer, however well-intentioned, could be costing your client hundreds of thousands of dollars at the closing table, and putting your reputation on the line in the process.
At Miles Consulting Group, we've spent 24 years helping companies resolve sales tax exposure, and a growing share of that work involves M&A due diligence. The pattern we see is consistent: advisors, brokers, and CPAs know that sales tax is a factor in deal negotiations, but the questions they're asking don't go deep enough to uncover real exposure.
Key takeaways: sales tax risk in M&A due diligence
- Most sellers genuinely believe they're in compliance, even when they have six- or seven-figure exposure across multiple states.
- A surface-level checklist question will not uncover the kinds of issues that derail deals, reduce purchase prices, or trigger escrow holdbacks.
- M&A advisors don't need to become sales tax experts; they need better questions and a specialist partner to bring in early.
- Proactive identification of sales tax risk protects the deal, the client's proceeds, and the advisor's credibility.
Why "do you have your sales tax handled?" is the wrong question
The M&A advisors we work alongside tell us the same thing again and again. They raise sales tax with the seller, and the seller says they've got it covered. The advisor, not being a state tax specialist, takes that at face value. And why shouldn’t they?
Sellers often think that because their CPA firm has the income tax side of the equation figured out in multiple jurisdictions, they also cover sales tax. But we find that is often not the case. Most CPA firms specialize in income tax (and financial audits), but not necessarily sales tax.
The problem is that most sellers are basing that confidence on an incomplete picture. Economic nexus laws, adopted by every state with a sales tax following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., means a company can owe sales tax in states where it has no physical presence at all. The threshold in most states is just $100,000 in revenue, and for any tech or SaaS company selling subscriptions nationwide, that threshold can be crossed in dozens of jurisdictions without anyone realizing it.
So when a seller says "we think we're compliant," that belief is often based on incomplete information. And when the buyer's CPA firm or Big Four advisors run their own analysis during tax due diligence, the exposure they uncover can reshape the entire deal.
How hidden sales tax exposure surfaces during M&A due diligence
We recently worked on a cross-border acquisition where a Europe-based technology group was acquiring a U.S. software company. The target sold electronically delivered software and cloud subscriptions nationwide but had never fully analyzed its nexus footprint. In anticipation of the sale, executives at the target company had rushed to register in several states without establishing consistent filing or collection processes. This compounded the risk rather than resolving it.
The deal faced multi-state historical exposure, unclear liability allocation between buyer and seller, and a substantial escrow holdback imposed at closing. Miles Consulting Group was engaged just days before the deal closed to clarify risk, allocate responsibility, and design a remediation plan. Through targeted negotiations and structured voluntary disclosure agreements, the escrow holdback was unlocked and approximately $100,000 was preserved for the sellers.
That outcome was positive, but it came at the last possible moment. Had an advisor on the seller side flagged this issue six to 12 months earlier, much of the disruption could have been avoided entirely.
In another engagement, a family-owned manufacturer preparing for sale faced a buyer's tax due diligence estimate of more than $2 million in exposure across over 20 states. The company's M&A consultant referred them to us. We conducted a comprehensive nexus study and taxability review, entered into voluntary disclosure agreements across multiple jurisdictions, negotiated penalty abatements, and reduced the initial exposure estimate by approximately $1 million. The transaction closed successfully.
Five sales tax questions every M&A advisor should ask during due diligence
You don't need to become a sales tax specialist. But you do need to go beyond "is your sales tax handled?" Here are five questions that can surface real risk before it becomes a deal-breaker:
- Have you conducted a formal nexus study in the past 12 to 18 months? If the answer is no, or if the study was done internally rather than by an independent specialist, there are likely gaps.
- Do you sell digital products, subscriptions, or software across state lines? If yes, economic nexus almost certainly creates obligations in multiple states. The taxability of these products varies from state to state, making this a particularly complex area.
- Who determined where you have collection obligations, and when? A general accountant's guidance from three years ago may not reflect current law. State rules change frequently, and obligations that didn't exist in 2020 may well exist today.
- Have you reviewed your exemption certificates and sales tax documentation recently? Incomplete or outdated documentation is one of the most common sources of exposure during tax due diligence.
- If a buyer's CPA firm ran an exposure analysis today, what would they find? This is the question that matters most. If your client can't answer it with confidence, that's the signal to bring in a specialist.
Why early specialist engagement protects both the deal and the advisor
Ideally, sales tax planning happens well before M&A is ever on the agenda. But once a transaction is in view, the best time to engage a sales tax consultant is 6 to 12 months before the seller goes to market. At that stage, there's time to conduct a thorough nexus study, quantify exposure accurately, pursue voluntary disclosure agreements where appropriate, and establish a defensible sales tax compliance posture before the buyer ever asks.
The second-best time is during active due diligence. It's less ideal, but structured remediation is still possible, as the examples above demonstrate.
The worst time is after the buyer's team has already quantified the exposure and used it to negotiate the price down. At that point, the seller is defending rather than controlling the conversation.
The advisor who catches this early is the one the client trusts with the next deal. Referring a specialist to address sales tax risk costs nothing and protects everything. We work alongside CPAs, brokers, wealth managers, and M&A consultants regularly, and we're always happy to discuss how a professional partnering relationship can work.
Ready to partner on your next deal?
If you advise clients through M&A transactions and want to ensure sales tax doesn't become the issue that reduces the purchase price or delays the close, we'd welcome a conversation. Contact Miles Consulting Group at info@milesconsultinggroup.com or book a consultation through our website.
Frequently asked questions
Why is sales tax exposure often missed during M&A due diligence?
Sellers frequently believe they're compliant because they file in their home state. But economic nexus laws mean they may have collection obligations in dozens of states based on revenue alone, without any physical presence. Unless someone with state tax expertise reviews their full multi-state footprint, these gaps go undetected until the buyer's team finds them.
How can unresolved sales tax issues affect a business valuation?
Buyers typically estimate potential liability and factor it into the deal. Common outcomes include a reduced purchase price, an escrow holdback to cover potential exposure, indemnification demands, or in some cases, a collapsed deal. Because sales tax is a gross tax, it cannot be offset by net operating losses the way income tax can, which makes the exposure particularly impactful.
What is a voluntary disclosure agreement and how does it help in M&A?
A voluntary disclosure agreement, or VDA, is a program offered by most states that allows businesses to come forward and resolve past-due sales tax obligations. VDAs typically shorten the lookback period to three or four years, waive penalties, and provide a structured path to compliance. In an M&A context, they're one of the most effective tools for reducing historical exposure before or during a transaction.
Should M&A advisors handle sales tax due diligence themselves?
Most M&A advisors, CPAs, and brokers are not specialists in multi-state sales tax. The most effective approach is to identify the risk early, ask the right questions, and partner with a firm that focuses exclusively on state tax remediation. This protects the client without requiring the advisor to develop expertise outside their core practice.
How far in advance of a sale should a company address sales tax exposure?
Ideally, six to 12 months before going to market. This allows time for a nexus study, exposure quantification, voluntary disclosure filings, and corrective measures. That said, remediation is possible at any stage; we've engaged on transactions just weeks before closing and still achieved meaningful outcomes for our clients.
Missouri & Louisiana Sales Tax: SaaS, Software & Digital Goods
This month, we continue our blog series by contrasting Missouri and Louisiana, two states in the South-Central U.S., each shaped by the Mississippi River, through the lens of technology and sales tax. Whether you offer Software as a Service (SaaS), sell prewritten or custom software, or distribute digital goods, you’ll find that each state carves out its own rules.
If you already know you need help with Missouri or Louisiana sales-tax questions, please reach out to us at info@milesconsultinggroup.com.
SaaS: Exemption Versus Taxation
Software as a Service (SaaS) is a booming segment of the economy, yet states remain divided on its taxability. In Missouri, cloud computing and SaaS are exempt from sales tax. The only caveat is that any tangible personal property purchased or used in Missouri to deliver those services (for example, servers or networking equipment) is subject to the state’s sales or use tax.
Louisiana, by contrast, chose to bring SaaS squarely into its tax base. As of January 1, 2025, the state’s definition of taxable “digital products” includes digital code, digital applications, and SaaS revenue. That means every subscription sale or usage fee you bill to customers in Louisiana carries a sales-tax charge at the point of sale.
Prewritten and Custom Software
When you sell software for download or installation, Missouri and Louisiana again take different tacks. Both states agree that off-the-shelf, prewritten software is taxable. Beyond that alignment:
- Missouri carves out a narrow exemption for custom software delivered electronically. The charge you bill your customer for development is not taxable, although any tangible property or taxable services you purchase or consume in creating that custom solution still carry Missouri tax.
- Louisiana offers no such carve-out—both prewritten and custom software delivered electronically are subject to state and local sales tax.
Digital Goods
E-books, music downloads, streaming video, and other electronically delivered content illustrate how patchwork digital-goods rules remain across America. Missouri treats all such digital products as exempt from sales tax, while Louisiana classifies them as taxable property at the moment of sale.
Sales-Tax Holidays
Each year, both states suspend sales tax for targeted categories over a short window:
- In Missouri, the annual “Show Me Green” holiday runs April 19–25, 2026. During that week, qualifying Energy Star appliances and HVAC equipment priced up to US $1,500 are sold tax-free. If an item exceeds $1,500, only the amount above the cap is taxed.
- Louisiana’s fall holiday (September 4–6, 2026) covers specified firearms, ammunition, archery supplies, hunting apparel, and safety equipment, with no price limit. All state and local sales tax is waived on eligible items.
For a broader look at state sales-tax holidays, see Avalara’s summary:
https://www.avalara.com/blog/en/north-america/2026/01/sales-tax-holidays.html
Economic & Industry Snapshots
The tax base in each state reflects its economic strengths. Missouri’s economy thrives on agriculture and natural resources: beef, pork, dairy, corn, soybeans, rice, cotton, and eggs all rank among the nation’s top producers. It sits sixth in hog production and seventh in cattle, while soybeans and rice rank in the top five. Mining—limestone, lead, coal, crushed stone—anchors another major sector, and St. Louis’s Anheuser-Busch leads the world in brewing. The state’s biotech and service industries—headquartered by firms such as Monsanto, Express Scripts, Emerson Electric, Edward Jones, and O’Reilly Auto Parts—add yet more diversity.
Louisiana, meanwhile, blends energy and agriculture with tourism. A global leader in crawfish (supplying roughly 90 percent of U.S. demand), Louisiana also produces cotton, soybeans, sugarcane, poultry, eggs, dairy, and rice. Its vast oil and natural-gas reserves power petrochemical, fertilizer, and fuel-processing facilities; paper, transportation equipment, and food processing plants; and an expanding life-sciences corridor. And of course, New Orleans’s tourism and gaming industries remain economic pillars for the state.
A Few Fun Facts
To round out our comparison:
- Missouri, nicknamed the “Show Me State” for its skeptical citizenry, also claims the titles “Mother of the West” and “Cave State.” It hosted the U.S. Summer Olympics in St. Louis in 1904 and is the birthplace of Harry S. Truman, Mark Twain, and Walt Disney.
- Louisiana, named for King Louis XIV, is the only U.S. state divided into parishes instead of counties. Its French-Cajun heritage shines in festivals like Mardi Gras and in towns such as Breaux Bridge, the self-proclaimed “Crawfish Capital of the World.”
Further Exploration
We invite you to revisit our earlier deep dives for more context:
- Focus on Missouri: https://milesconsultinggroup.com/blog/2022/05/03/focus-on-missouri-2/
- Focus on Louisiana: https://milesconsultinggroup.com/blog/2021/11/10/focus-on-louisiana-2/
Whether you operate in Missouri, Louisiana, or anywhere else, Miles Consulting Group is ready to help you navigate the complexities of multi-state sales tax and optimize your strategy. Contact us today to discuss how we can support your specific needs.
Selling your tech company? How sales tax exposure could cost you at the closing table
If you've built a tech or SaaS company to $10 million or more in revenue and you're considering a sale, there's a good chance your sales tax exposure is larger than you think. We say this not to alarm you, but because we've seen it play out dozens of times. The seller is confident their tax house is in order. The buyer's due diligence team runs their own analysis. And a six- or seven-figure liability appears that nobody anticipated.
At Miles Consulting Group, we work with companies on the selling side of M&A transactions to identify, quantify, and resolve sales tax exposure before it erodes the value of the deal. The companies most affected tend to be fast-growing tech and SaaS businesses selling digital products and subscriptions across state lines, which is exactly the profile of the companies we work with.
Key takeaways: protecting your valuation from sales tax exposure
- Tech and SaaS companies are particularly vulnerable to undetected multi-state sales tax exposure because of economic nexus laws and complex taxability rules for digital products.
- Buyers will find your exposure during due diligence and use it to negotiate the purchase price down or impose escrow holdbacks.
- Proactive remediation before going to market protects your valuation and keeps you in control of the conversation.
- Voluntary disclosure agreements can reduce historical liability, waive penalties, and shorten lookback periods across multiple states simultaneously.
Why economic nexus creates hidden sales tax exposure for tech and SaaS companies
Since the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. (PDF), every state with a sales tax has adopted economic nexus rules. If your company generates more than $100,000 in revenue in a state (the threshold in most jurisdictions), you may be required to collect and remit sales tax there, even with no physical presence.
For a SaaS company selling subscriptions nationwide, crossing that threshold in 20 or 30 states is not unusual. And the taxability of your products makes the picture even more complicated: states classify SaaS differently. Some treat it as tangible personal property, others as a taxable service, and some exempt it entirely. Implementation fees, training services, data processing, and AI-powered features may each be treated differently within the same state.
Many companies rely on a general accountant or an automated tax platform without specialist oversight. The software calculates rates, but if the underlying configuration doesn't reflect how each state classifies your specific products, the output is wrong. We've seen cases where companies filed for years based on flawed assumptions and never knew it.
The exposure compounds quickly. At an average combined rate of 6% to 8% across multiple states, even moderate revenue can generate a liability in the hundreds of thousands, and it grows with every quarter you continue selling without collecting.
What happens when a buyer uncovers your sales tax exposure
When a larger company is considering acquiring your business, their tax advisors (often a Big Four firm or a specialist state tax practice) will run their own tax due diligence. They'll look at where you have economic nexus, where you're registered, where you're filing, and where the gaps are.
If they find exposure, the deal starts to shift. You may see a reduced purchase price, an escrow holdback to cover the estimated liability, indemnification clauses in the purchase agreement, or, in some cases, a deal that falls apart entirely. The buyer's estimate is designed to protect the buyer, so it tends to be conservative. If you haven't done your own analysis, you'll be responding to their numbers rather than presenting your own.
We worked with a family-owned manufacturer and equipment lessor that was preparing for sale when the buyer's due diligence identified potential sales tax exposure exceeding $2 million across more than 20 states. The company had collected tax properly in its home state but hadn't evaluated the impact of economic nexus laws or destination-based sourcing rules in other jurisdictions. What had long felt like a localized compliance issue became a transaction-level risk that threatened the value of the family's exit.
Their M&A consultant referred them to Miles Consulting Group. We conducted a comprehensive nexus study and taxability review, entered into voluntary disclosure agreements to reduce lookback periods, negotiated penalty abatements, and contacted customers to determine whether tax had already been self-assessed. The initial $2 million estimate was reduced by approximately $1 million, and the transaction closed successfully.
How to address sales tax exposure before you go to market
The best approach is to take control of the analysis before a buyer does it for you. We recommend working through these steps in order.
Commission a nexus study. Understand where you actually have collection obligations based on your current revenue, transactions, and activities. This is the foundation for everything that follows.
Conduct a taxability review. Determine how your specific products and services are classified in each relevant state. For tech companies, this is especially critical because sales tax on digital products is applied inconsistently across jurisdictions.
Quantify your exposure. Get a realistic, defensible number rather than waiting for the buyer to guess. A specialist-reviewed analysis carries weight in negotiations that an internal estimate does not.
Remediate strategically. Voluntary disclosure agreements, offered by most states, allow you to come forward and resolve past-due obligations with reduced lookback periods (typically three to four years) and penalty waivers.
Document everything. A clean, well-documented sales tax compliance posture gives buyers confidence, reduces the risk of successor liability disputes, and preserves your negotiating position.
The ideal time to address sales tax is before M&A is ever on the agenda. Once it is, timing matters. 6 to 12 months before going to market is ideal, but even during active due diligence, remediation is possible. We've worked on transactions where we were brought in just days before closing and still achieved meaningful results.
The difference between a defensible number and a guess
Sellers who present a documented, specialist-reviewed exposure analysis are in a stronger negotiating position. The buyer's estimate is built to protect the buyer; yours should protect you.
In the case of the family-owned company referenced above, the buyer's initial $2 million figure included assumptions that didn't hold up under specialist review. By analyzing the actual nexus triggers, taxability classifications, and lookback periods state by state, we reduced the number by approximately half. That wasn't about hiding liability. It was about accuracy.
You've spent years building this company. Don't let unresolved sales tax exposure erode the value you've created. The best time to address it is before anyone asks. The second-best time is now.
Considering a sale in the next 12 to 24 months?
Let's review your sales tax posture before due diligence begins. Contact Miles Consulting Group at info@milesconsultinggroup.com or book a consultation through our website.
Frequently asked questions
How much can unresolved sales tax exposure reduce a business valuation?
It depends on the scale of the exposure and the deal structure, but in our experience, holdbacks of $500,000 to $2 million are not uncommon in mid-market tech transactions. In some cases, deals have collapsed entirely because the buyer couldn't quantify the risk or the seller couldn't demonstrate a path to remediation.
What is economic nexus and why does it matter when selling a business?
Economic nexus means a state can require you to collect and remit sales tax based on your revenue or transaction volume in that state, even without any physical presence there. For tech and SaaS companies selling nationwide, this typically creates obligations in dozens of states. When selling a business, any unresolved obligations become a liability that the buyer will identify and factor into the deal.
Can sales tax exposure be resolved during an active M&A transaction?
Yes. While earlier is always better, experienced specialists can design and execute remediation plans during due diligence or even in the final days before closing. Tools like voluntary disclosure agreements allow companies to come forward and resolve past-due obligations with reduced penalties and shortened lookback periods, even under tight transaction timelines.
What is the difference between a nexus study and a taxability review?
A nexus study identifies where your company has a legal obligation to collect and remit sales tax, based on your revenue, transactions, and physical activities in each state. A taxability review determines how your specific products or services are classified and taxed in each jurisdiction. Both are essential: you need to know not only where you owe, but what you owe on.
How do voluntary disclosure agreements reduce sales tax liability?
Voluntary disclosure agreements are programs offered by individual states that allow businesses to resolve past-due tax obligations proactively. They typically limit the lookback period to three or four years rather than the full statute of limitations, waive penalties, and provide a structured path to ongoing compliance. For companies preparing for a sale, VDAs are one of the most effective tools for reducing historical exposure.
Indiana’s 2026 Sales and Use Tax Amnesty Program
The Indiana Department of Revenue recently announced a limited-duration amnesty program. Taxpayers may participate in the amnesty program from July 15 through September 15, 2026. The program is tailored to assist taxpayers like retailers and marketplace facilitators, in remediation for outstanding sales and use tax liabilities.
Timely applicants can eliminate penalties and interest owed pre-January 1, 2024, by simply paying off the underlying tax due. For quickly growing businesses, missteps in compliance can happen. Forgetting relatively small underpayments, exempt or excluded transactions being overlooked, and delayed filing of returns can accumulate substantial penalties and interest, especially over time. If this sounds like you, please reach out to Miles Consulting Group at info@milesconsultinggroup.com.
Why You Should Consider Amnesty Participation
If you’re a multi-state retailer navigating complex sourcing rules, a marketplace facilitator or third-party seller, or a business mistakenly using the wrong exemption or resale certificates, this program offers a rare chance to reset your compliance challenges without punitive costs.
The program will immediately waive all statutory penalties, along with forgiveness of interest accrued through June 30, 2026. (That’s where an amnesty like this can really benefit a company that has significant outstanding liabilities.) An eligible taxpayer who owes sales or use tax, as well as interest and penalties, accrued on or before June 30, 2026, must file a complete application through the Indiana Department of Revenue’s portal between July 15 and September 15, 2026. In addition, payment in full for the underlying tax liability, for pre-2024, must be received by the state on or before September 15, 2026
Partial payments, incomplete applications, or filings after the deadline will not qualify for penalty or interest relief.
Another unique aspect of this Indiana Amnesty program? The state is allowing companies under audit with an assessment to take advantage of it. This means that even though the Department has begun a formal review, the state believes your company is liable for tax, and took the steps to initiate a proposed assessment, a company may still opt into the amnesty window and reap the benefits! In most cases, businesses that have already been approached by the state would have to wait out the audit process or appeal the assessment, and would often not be eligible for such a program. As long as your company has not participated in a past amnesty, the business is still eligible to participate in the July 15 through September 15, 2026, Indiana tax amnesty program.
What Businesses Need to Do Now – In Indiana and Beyond
Businesses that operate in multiple state jurisdictions and have left state compliance matters on the back burner take the following steps:
- Specifically in Indiana, perform an analysis to determine when Nexus began in the state, determine whether your products and services are taxable in the state, and calculate estimated liability due to the state.
- Determine whether the amnesty process makes sense given those findings above.
- For any gap period not covered (i.e., January 2024 forward, determine other forms of remediation (such as VDAs, other back-filings, etc.) to become current.
- Contact us for assistance!
In Other states:
- Engage a Specialist. Consider a sales tax compliance expert to review nexus determinations, sourcing rules, and marketplace facilitator obligations.
- In states where already filing, audit and enhance record-keeping best practices. Reconcile all returns, exemption certificates, and use-tax self-assessments. Identify periods with underpayment or missed filings.
- Verify Certificate Validity. Ensure your resale and exemption certificates are on file and current. Provide supporting documentation for exemption or resale claims where applicable.
- Automate Sales Tax Collection. Review your point-of-sale or e-commerce system settings to capture the correct rates and jurisdictions.
- Train Staff. Educate accounting and operations teams on proper invoice coding and exemption-handling procedures.
In conclusion, Miles Consulting Group is here to help prepare retroactive or amended delinquent returns or complete registration requirements. For businesses qualified to participate in the program, we can assist with application requirements for liabilities incurred before January 2024.
Vermont & Maine Sales Tax Spotlight: SaaS, Software, and Digital Goods
In this month’s state tax spotlight, we’re heading to two of New England’s most distinctive markets: Vermont and Maine. While they may share scenic coastlines, mountain views, and strong local economies, their treatment of technology transactions tells two very different tax stories. For businesses selling SaaS, software, and digital products, understanding those differences can be the key to staying compliant and protecting revenue.
Already dealing with Vermont or Maine sales tax questions? The Miles Consulting Group team is here to help. Contact us at info@milesconsultinggroup.com.
SaaS: A Tale of Two States
Software as a Service remains one of the most nuanced areas of state taxation, and Vermont and Maine are a perfect example of why companies cannot take a one-size-fits-all approach.
In Vermont, cloud computing services are taxable. Effective July 1, 2024, prewritten computer software is subject to sales and use tax regardless of how it is paid for, delivered, or accessed. That means software accessed remotely, including many SaaS offerings, moved from exempt to taxable under H.B. 887, Laws 2024.
Maine takes a different position. SaaS is generally not taxable when the software is not downloaded. For companies operating in both states, this contrast creates an important compliance checkpoint: the same revenue stream may be taxable in Vermont and exempt in Maine.
Prewritten vs. Custom Software
When it comes to software sales, both states draw meaningful distinctions that can directly affect invoicing, tax collection, and audit exposure.
Vermont imposes sales and use tax on prewritten computer software, including software delivered electronically. Since July 1, 2024, the tax applies regardless of delivery method, reinforcing the state’s broader approach to taxing technology transactions.
Maine also taxes prewritten computer software delivered electronically. However, in both Vermont and Maine, custom computer software delivered electronically is generally not subject to tax. That distinction can be especially valuable for companies offering tailored solutions, modifications, or custom development work.
Digital Goods: Similar Outcome, Different Broader Frameworks
Digital products continue to be a moving target across the country, with states varying widely in how they treat items such as e-books, music, and streaming content. In this category, Vermont and Maine align more closely: digital products are taxable in both states.
That consistency may sound simple, but businesses still need to evaluate how products are bundled, delivered, and described on invoices to ensure the right tax treatment is applied.
Sales Tax Holidays
Sales tax holidays often attract attention from both consumers and businesses, but not every state participates. For 2026, neither Vermont nor Maine has a sales tax holiday in effect.
For more information on sales tax holidays, visit: https://www.avalara.com/blog/en/north-america/2026/01/sales-tax-holidays.html
Why These States Matter
Tax rules do not exist in a vacuum. They reflect the character of each state’s economy, and both Vermont and Maine have strong, recognizable industry identities that make them compelling markets for growing businesses.
Vermont’s economy is rooted in iconic local strengths such as maple syrup, dairy farming, tourism, and outdoor recreation. The state remains the nation’s leading maple syrup producer and is home to popular ski destinations, state parks, boutique hospitality, and a rich agricultural tradition.
Maine combines agricultural production with maritime heritage and a thriving tourism economy. From blueberries, dairy, and maple products to commercial fishing, bottled water, and shipbuilding, Maine’s economy is both diverse and resilient. Its appeal as a destination for hiking, skiing, boating, camping, and sport fishing only adds to its commercial relevance.
A Few Fun Facts
Vermont highlights:
- Montpelier is the least-populous state capital in the United States.
- Vermont is famous for its covered bridges, Green Mountains, and the Vermont Teddy Bear Factory in Shelburne.
- Lake Champlain is one of the largest bodies of fresh water in the United States.
- The state name likely comes from the French phrase meaning “the Green Mountains.”
Maine highlights:
- Maine is the only U.S. state with a one-syllable name and the only one that borders just one other state.
- Moosehead Lake is the largest lake wholly within New England.
- Eastport is the easternmost city in the United States.
- With about 83% forest cover, Maine is the most heavily forested state in the country.
The Bottom Line
For businesses navigating multistate sales tax, Vermont and Maine offer a valuable reminder: neighboring states can take very different approaches to taxing the same technology transaction. SaaS may be taxable in one state and exempt in the other. Prewritten software may be taxed similarly, while custom software may be treated more favorably.
That is why proactive tax planning matters. The Miles Consulting Group team can help you evaluate your products, revenue streams, and filing responsibilities across Vermont, Maine, and beyond so you can reduce risk and improve tax efficiency.
To explore these states further, take a look at our earlier blog posts:
- Vermont: https://milesconsultinggroup.com/blog/2022/01/12/focus-on-vermont-2/
- Maine: https://milesconsultinggroup.com/blog/2020/12/09/focus-on-maine-2/
Have questions about your specific facts and circumstances? Reach out to Miles Consulting Group. We are always ready to help you navigate the complexity of multistate tax.
Nexus and Sales Tax: Does Your SaaS Company Have Obligations in Other States?
Growth is something every SaaS company is working toward. More customers, more recurring revenue, more states. But here's something that doesn't always make it onto the radar as the business scales: your nexus footprint grows right alongside your customer base.
We talk to SaaS finance leaders regularly who are surprised to discover they have sales tax obligations in states they've never given a second thought to. Not because they've been careless, but because the rules have changed significantly over the past several years and the triggers aren't always obvious. This is particularly true for SaaS businesses, where there's often no warehouse, no storefront, and sometimes no employees outside of a home state.
If your company has been growing and you haven't recently taken stock of where you might have nexus, 2026 is a good time to do it. State enforcement activity around digital services has increased, and the cost of being caught off-guard is considerably higher than the cost of getting ahead of it.
This article is designed to help you think through your own situation: what to look at, where the SaaS-specific blind spots tend to be, and what to do if you think you might have exposure you haven't addressed.
Key Takeaways
- Economic nexus means your revenue alone can create sales tax obligations in states where you have no physical presence
- Remote employees and contractors can independently trigger nexus in states where they work, regardless of your revenue there
- States treat sales tax on SaaS products differently: having nexus does not always mean you owe tax on your specific product
- If you suspect unaddressed nexus exposure, a formal review before registering is the recommended first step
CTA: Sales tax obligations don't wait for a convenient moment to surface. Talk to us today about where your company stands. Contact Miles Consulting Group
Sales Tax is the Responsibility of the Seller, and that Includes You
This is the part that often surprises founders and finance leaders who are newer to multi-state sales tax compliance. Sales tax isn't a cost your customers bear independently, it's a tax you are required to collect on their behalf and remit to the state. If you don't collect it, the liability doesn't go away. It stays with you.
Before the Supreme Court's 2018 South Dakota v. Wayfair ruling, you generally needed a physical presence in a state to have an obligation there. That's no longer the case. Economic nexus is now the standard across virtually every state that has a sales tax, meaning your revenue volume alone can create an obligation: no office, no employees, no physical footprint required.
For SaaS companies selling to customers across the country, this means your potential exposure is wider than many realize, and it grows as your business grows.
The SaaS-Specific Nexus Triggers That Catch Companies Off Guard
For a product-based business, nexus triggers are relatively intuitive: a warehouse, an employee in a new state, trade show attendance, for example. For SaaS companies, the triggers can be less obvious. Here are the ones we see catch growing companies by surprise most often.
Crossing an economic nexus threshold mid-year. Most SaaS companies are aware that economic nexus thresholds exist, but it's easy to lose track of exactly when you cross one, particularly if you're growing quickly.
In most states the threshold is $100,000 in annual sales, though some larger states like California, New York, and Texas sit at $500,000. Once you cross a threshold, your obligation begins. If nobody is actively monitoring that, you can end up with quarters of uncollected tax before anyone notices. For a full breakdown of thresholds by state, our State Nexus Cheat Sheet for SaaS is a useful reference.
Remote employees creating physical presence nexus. This one has become far more common as remote work has normalized. If you have a developer, a customer success manager, or a sales rep working from their home in another state, that can be enough to establish physical presence nexus there, regardless of your revenue in that state. It's one of the most frequent ways we see SaaS companies accumulate obligations they weren't expecting.
Third-party contractors and service providers. Engaging contractors who perform work on your behalf in a state, even for a limited time, can also create nexus. This is worth reviewing if you use external implementation partners, white-glove onboarding teams, or other service providers who operate across state lines.
How states treat sales tax on SaaS revenue varies considerably. Not all states impose sales tax on SaaS subscriptions, and those that do don't always apply it in the same way.
Some states treat access to software as taxable data processing. Others classify it as an information service, which may be exempt. Some states exempt SaaS subscriptions used for manufacturing or R&D purposes. These variations mean that simply knowing you have nexus in a state isn't enough, you also need to know whether sales tax applies to your specific product in that state and at what rate. Our interactive SaaS Sales Tax by State map gives you a state-by-state picture of how sales tax applies to SaaS revenue streams across the country.
Bundled services. If your SaaS product is sold alongside professional services, implementation, or support in a single contract or invoice, how you bundle and price those elements can affect whether sales tax applies. Some states will tax the entire bundle if a taxable component is included. Others allow you to separate taxable from non-taxable items, but only if your invoicing supports that distinction.
CTA: Any of these scenarios sound familiar? It's time to get a clear picture of your exposure. We can help. Get in touch with our team to discuss a nexus review.
How to Read Your Own Exposure
Before you can determine what to do next, it helps to take stock of where you currently stand. Here are the key things to look at internally.
Where are your customers located, and how much revenue are you generating in each state? Your billing system should be able to give you this picture. Run a report by state and compare it against the economic nexus thresholds. If you're close to or over the threshold in states where you're not currently registered and collecting, this requires further investigation.
Where do your employees work? Not just at your headquarters, but every remote employee, contractor, or freelancer who regularly performs work on your behalf. Map that out by state and factor it into your nexus analysis alongside your revenue data.
When did your obligations begin? This is the question most companies find uncomfortable, because the answer is often "earlier than we thought." Most states require you to indicate on your registration form exactly when nexus was created and that date determines how far back your filing obligations go. This is why a proper nexus review matters: it gives you a defensible, documented answer to that question.
What's Changed in 2026 That SaaS Companies Should Factor In
The nexus rules themselves are largely settled now with both physical and economic nexus being the standard across the board. But a few developments are worth keeping on your radar as you assess your current position.
Several states have updated or expanded their definitions of taxable digital services in the past 12 to 18 months, with some now explicitly capturing categories of SaaS revenue that were previously in a gray area. Washington's expansion of its retail sales tax to cover additional digital services categories is a notable example, as is Illinois: effective January 1, 2026, the state eliminated its 200-transaction threshold entirely, meaning economic nexus is now triggered solely by $100,000 in Illinois sales. And for SaaS companies with customers in Chicago specifically, the city's Personal Property Lease Transaction Tax on software use increased to 15% from the start of 2026. We've covered both updates in detail in our Illinois and Chicago 2026 update.
If your product has evolved new features, new delivery mechanisms or new service categories, whether sales tax applies to your revenue in certain states may have changed even if your nexus situation hasn't.
Trailing nexus is also worth understanding if you've recently scaled back operations in any state or dipped below a threshold. Several states require you to continue filing for a period after nexus-creating activities cease, even if you no longer meet the threshold. California, for example, requires continued registration through the calendar year in which nexus occurred and the following year. We've written in more detail about this in our article on trailing nexus.
What to Do If You Think You Have Nexus You Haven't Addressed
The most important thing is not to simply register and start collecting without understanding the full picture first. Most states require you to declare on your registration form when nexus was created. If that was two or three years ago, the state may expect back taxes, interest, and potentially penalties going back to that date. Registering without addressing prior periods doesn't resolve the exposure, it can actually draw attention to it.
The right first step is a formal nexus review, which gives you a clear, documented picture of where your obligations lie, when they began, and what your exposure looks like. From there, options like Voluntary Disclosure Agreements are often available to resolve prior periods on more favorable terms, in many cases waiving penalties entirely for companies that come forward proactively. The Streamlined Sales Tax Governing Board also offers a centralized registration system that can simplify the process for companies with obligations in multiple member states.
Not sure if this applies to you? Run through this quick checklist.
- We know exactly which states we have nexus in, based on a formal review completed within the last 12 months
- We are actively monitoring our revenue by state and have a process in place to identify when we approach or cross an economic nexus threshold
- We have accounted for all remote employees and third-party contractors when assessing our physical presence nexus obligations
If you couldn't check every box, don't put it off. Talk to us today.
For a growing SaaS business, sales tax obligations arise wherever your customers are and in 2026, that means most companies selling nationally have obligations in more states than they're currently managing.
The good news is that getting on top of this is very manageable when you approach it proactively.
At Miles Consulting Group, nexus determination and review is one of the core things we do. Our team has over 24 years of experience helping SaaS and technology companies understand exactly where they stand and what to do about it. We offer a free 30-minute consultation to talk through your situation and help you figure out the right next steps. Reach us at info@milesconsultinggroup.com or book a call.
Frequently Asked Questions
Does my SaaS company have sales tax obligations if I don't have any offices outside my home state? Quite possibly, yes. Since the 2018 Wayfair decision, physical presence is no longer required to create a sales tax obligation. If your revenue or transaction volume exceeds a state's economic nexus threshold, you have an obligation there, regardless of where your office is located. Remote employees can also create physical presence nexus independently of revenue thresholds.
How do I know which states I have nexus in? Start by pulling a revenue report by state from your billing system and comparing it against economic nexus thresholds. For a quick state-by-state reference, our State Nexus Cheat Sheet for SaaS is a helpful starting point. For a definitive, defensible answer, a formal nexus review is the right approach.
Does sales tax apply to my SaaS product in every state where I have nexus? Not necessarily. States vary considerably in how they treat sales tax on SaaS revenue. Some impose sales tax on SaaS subscriptions fully, some partially, some not at all. Having nexus in a state means you have a filing obligation there, but whether you are required to collect sales tax depends on how your specific product is classified in that state. Our SaaS Sales Tax by State map gives a useful overview of how sales tax applies to SaaS revenue streams across the country.
Can I just register and start collecting tax going forward, without worrying about prior periods? Unfortunately it's not quite that straightforward. Most states require you to indicate when nexus was created on your registration form. If that was two or three years ago, the state may expect back taxes from that date. A nexus review helps you understand the full scope before you register, and options like Voluntary Disclosure Agreements can help resolve prior periods proactively on more favorable terms.
What is trailing nexus and does it apply to my company? Trailing nexus refers to the obligation to continue filing in a state for a period after you no longer meet the nexus threshold. Not all states have trailing nexus rules, and for those that do, the duration varies.
What's the first step if we think we have unresolved nexus exposure? A nexus review. It gives you a clear picture of where your obligations lie, when they began, and what your exposure looks like, which is the foundation for everything that comes next. Get in touch and we can walk you through the process.
Can remote employees create sales tax nexus for my SaaS company? Yes. If you have employees working remotely from another state, even from a home office, that can be enough to establish physical presence nexus there. This applies regardless of whether your revenue in that state meets the economic nexus threshold. It's one of the most common ways SaaS companies unknowingly create obligations in states they haven't considered.
