Sales Tax Update - February 2026

Included in Avalara’s recent 2026 Tax Changes Report is a reference to the Tax Foundation Institute’s 2024 publication, Modernizing State Sales Taxes: A Policymaker’s Guide, Tax Foundation Institute (September 5, 2024).  In the Tax Foundation’s report, they reference that the the mean sales tax breadth (i.e. scope, or number of products and services subject to tax) dropped from nearly 50% in 2000 to less than 35% in 2022.

It is reasonable to surmise that some of this decline is due to the shift of historically tangible products to digital products and services that are now delivered electronically and therefore fall outside the scope of items historically subjected to some state sales taxes.  We will continue to see states expand the breadth of their sales tax to include these new digital products and services, either through legislative or rulemaking processes, or through audit enforcement.  More likely it will be a combination of these for states seeking to stem this decline. 

Ever since Colorado’s 2022 adoption of a retail delivery fee on purchased goods delivered to Colorado consumers, and Minnesota’s 2024 adoption of a similar retail delivery fee, it appeared that many more states would pursue this as a source of revenue.  However, while many states – including Hawaii, Illinois, Indiana, Maryland, Mississippi, Nebraska, Nevada, New York, Ohio, Oregon, Vermont, and Washington – have considered this measure, no other states have adopted a retail delivery fee. 

Will we see more of these? Or have states moved on to more pressing sales tax revenue matters, such as taxing the digital economy?

Most sales tax compliance software solutions offer an economic nexus tracker tool.  (Hint: if you’re not using one, you should be!) This makes sense – so long as all of your revenue streams are connected and passing through to the sales tax platform (Hint: this includes marketplace sales), these platform can aptly monitor when your sales approach and exceed each state’s economic nexus threshold.  However, this only captures part of your business’ nexus and resulting obligations:

1. Being that some thresholds are based on only taxable sales, or exclude marketplace and/or exempt sales, you will want to have your sales tax advisor closely analyze your sales before rushing out and registering in a state, and
2. More importantly, this does not consider physical presence nexus!

That’s right.  While the Supreme Court in South Dakota v. Wayfair decided that physical presence in no longer required to establish substantial nexus for sales tax purposes, this does not mean the physical presence does not establish sales tax nexus.  If anything, it made it easier for state’s to asset physical presence based on myriad factors, now that even sales alone may establish nexus. 

With almost regularity, when we speak with new clients about sales tax nexus, they are primarly concerned with uncertainty about where their sales have established economic nexus for sales tax.  Then our conversation shifts to physical presence creating activities, only to hear such things as:

• We have employees in 10-15 states; or
• We don’t have employees, but we use independent contractors to provide services all over the country; or
• We store inventory in numerous warehouses throughout the country.

Each of these scenarios, and numerous more like them, will create physical presence nexus for sales tax compliance.  Economic nexus thresholds only come into play in the absence of physical presence – that is, when a taxpayer is considered a remote seller, i.e., a seller that lacks physical presence in the state. 

For a company that is concerned about nexus, it is imperative to work with a sales tax advisor that understands sales tax nexus, what creates it, and what to do if the company has nexus, and historical taxable sales that create material exposure for the company.

Moral of the story: Have a sales tax expert review your sales tax nexus – both physical presence and economic nexus, before the state does.  Once you understand where you have nexus, you can have them advise on which of these states tax what you sell, quantify historical exposure, and map out a path forward to automated compliance, including implementation of software, registrations and resolution of any material historical exposure identified.