How to Manage Sales Tax Compliance in Complex Industries

Managing your sales and use tax obligations is a hassle for any business owner, but for some companies it can feel like fighting an uphill battle.

Industries like telecommunications, hospitality, healthcare, manufacturing, and technology face unique challenges when it comes to sales and use tax obligations. And what you sell and the way you get to marketing can add even more confusion.

So what makes an organization more complex in terms of sales tax compliance? Complexity often stems from selling a diverse mix of products or services, but that’s just one piece of the puzzle. Other factors that increase complexity are:

• Selling to tax-exempt customers (like nonprofits or resellers)
• Operating in many states or jurisdictions (creating a wide nexus footprint)
• Maintaining multiple physical locations, or housing inventory in off-site warehouses
• Selling through various channels (e.g., retail, wholesale, online)
• Managing multiple legal entities with different offerings

Each of these introduces new layers of risk, especially as companies grow and expand operations.

A Look at Sales Tax Risk by Industry

Some industries are naturally more exposed to tax risk due to how their products are defined, delivered, or regulated.

Telecommunications

Telecom is the most taxed and regulated industry across all the states. This is because in addition to a telecom tax, they also face other taxes and regulatory fees such as communications services taxes, utility users taxes, 911 fees, and other surcharges—all of which vary by state and even city. Plus, the line between telecom and software services continues to blur, creating even more uncertainty.

Healthcare

There are so many different variables in the delivery of healthcare, and legislatures have always been sensitive to trying to recognize the things that are truly needed in the industry. As a result, you get a broad set of exemptions, things that are identified statutorily as being exempt but would otherwise be taxable. An example of this is prosthetics—they’re technically TPP (tangible personal property); however, most states are exempt because of need.

Technology

Software and SaaS companies used to fly under the sales tax radar, but that’s changed. Most states now tax SaaS, and laws continue to evolve as states chase revenue from digital products and out-of-state sellers. What’s taxable in one state may not be in another, so staying current is essential.

Manufacturing and Mining

These sectors often benefit from exemptions and direct pay permits due to the economic value they bring (jobs, investment). However, managing those exemptions across multiple states and tracking usage properly, can get pretty tricky.

Brick-and-Mortar Retailers

If you’re delivering products or operating in multiple locations, things get tricky. You may be required to apply destination-based tax rates, register each location separately, and segregate sales data for reporting—even if it all rolls into one return.

This is especially tricky when looking at delivering purchases across state lines. At that point, you need to be able to differentiate between whether or not a product is taxable where the sale took place, in addition to the destination state where the customer is taking possession. No longer is it a set sales tax rate within your specific state’s taxability laws.

Multi-Channel Selling: A Sales Tax Compliance Multiplier

How you go to market plays a big role in determining your tax obligations. Selling through multiple channels increases the likelihood of triggering nexus and makes compliance far more challenging.

Direct Sales (Retail and Online)

Selling directly to customers—whether in-store or online—means you're responsible for collecting and remitting sales tax. Since the 2018 South Dakota v. Wayfair ruling, physical presence is no longer the only way to establish nexus. States now enforce economic nexus, meaning if you exceed certain sales thresholds (often $100,000 in sales or 200 transactions), you may be required to collect tax.

Today, 45 states plus the District of Columbia enforce economic nexus laws. Businesses must track where they’ve crossed thresholds and determine the taxability of each product or service across those states. This does not do away with physical presence, but instead, adds to it. You are considered to have nexus if you have a physical presence or established economic nexus.

Wholesaling and Drop Shipping

Wholesale transactions often qualify as exempt if the buyer provides a valid resale certificate. But exemption certificate rules vary by state—some require specific forms, and others have shorter validation periods. One must ensure their certificates are valid and up-to-date and have access to them in case they are audited.

Drop shipping adds another layer of complexity. Retailers may not take possession of the product, but if they have nexus in the customer’s state (or the ship from state), they may still be responsible for tax collection. Managing exemption certificates across all parties involved (supplier, retailer, customer) is critical—and easy to get wrong.

Marketplace Facilitators

Marketplace facilitators like Amazon, Etsy, and eBay are typically responsible for collecting and remitting tax on behalf of sellers. However, if you also sell via your own site, you still need to calculate total sales across all platforms to determine if you’ve crossed economic nexus thresholds. Many states establish economic nexus based off your gross sales, not just your retail sales.

Inventory stored by the facilitator can also trigger physical nexus in the state where it’s warehoused—even if you didn’t know the inventory was there. Some states (like Illinois and Pennsylvania) are softening their stance on this, but sellers should still monitor developments and their facilitator agreements closely.

Key Sales Tax Risk Areas

1. Nexus Monitoring

Sales tax nexus—whether physical or economic—is the foundation of your compliance strategy. If you’ve got employees, property, or inventory in a state, you likely have physical nexus. If you surpass a state’s sales or transaction thresholds, you have an economic nexus. Both create an obligation to collect and remit tax.

2. Taxability of Products and Services

What’s taxable in one state might not be in another. States continue to expand their definition of taxable digital goods and services, so understanding how your offerings are categorized is essential.

3. Situsing (Where Tax Is Applied)

Situsing determines which location’s tax rules apply to a transaction. For in-store purchases, it’s simple—the tax is based on the store’s location. But for shipped goods or digital services, it gets more complex:

• In origin-based states, tax is applied based on where the product is shipped from.
• In destination-based states, tax is based on where the product is shipped to—typically the customer’s address.

For SaaS and other digital services, situsing is even trickier. A customer might be billed in a state that taxes SaaS, but the users could be spread across multiple states. Some jurisdictions may require allocating tax based on user location, while others apply tax based on the billing address.

Understanding where a transaction is “taxable” is critical to avoid errors in collection and reporting—especially when operating across multiple states.

4. Sales Tax Calculation

With over 12,000 sales tax jurisdictions in the U.S., keeping up with rates and rules is a full-time job, and relying on spreadsheets or manual entry leaves a lot of room for error. Tax automation tools can help—but only if they’re properly configured and regularly maintained.

5. Exemption Certificate Management

If your business deals with exempt sales, you must collect, validate, and store exemption certificates. There are two primary types:

• Use-based exemptions, like resale certificates (common in manufacturing and R&D)
• Entity-based exemptions, for organizations like nonprofits, religious institutions, and government agencies

Certificates must be accurate, complete, and renewed regularly (typically every one to three years). Failing to collect a valid certificate can lead to assessments and penalties—even if the sale was genuinely exempt.

Don’t Leave Sales Tax Compliance to Chance

Sales tax compliance can feel overwhelming, especially if your organization has complex operations, product lines, or selling models. But ignoring your exposure risks snowballing into costly audits, penalties, and back taxes.

The good news? With the right strategy—and support—you can stay ahead of these obligations. Taking a proactive approach is key.

About the Author

Robert Dumas

Accountant, consultant, and entrepreneur Robert Dumas has over 30 years of experience in accounting and tax, with a focus on sales and telecom tax. A University of Georgia alum, he founded TaxConnex in 2006 on the principle that the sales and telecom tax industry needed more than automation to truly help clients comply.

Company: TaxConnex
Website: www.taxconnex.com
Connect with me on LinkedIn.