How an E-Commerce Company Resolved Multi-State Sales Tax Exposure

The owner came to us saying she had received "some notices from a couple of states" and wanted help responding to them. What she actually had was a Wayfair economic nexus problem across eleven states, none of which she was registered in for sales tax, built up over three years of rapid growth on a platform that had never been configured to collect tax correctly outside her home state.

Her business sold direct-to-consumer through her own Shopify site and through two marketplace channels. She assumed marketplace facilitator laws meant the marketplaces were handling all of her sales tax obligations, which was true for marketplace-facilitated sales but not true for the roughly 40 percent of revenue that came through her own site, where she remained the party responsible for collection and remittance.

The two notices that prompted the call were from Texas and Pennsylvania, both proposing assessments based on estimated sales because she had never filed. Left unaddressed, the exposure would have continued to grow with each state applying its own look-back period, penalty structure, and interest rate, and audits in one state tend to draw attention from neighboring states once a pattern is visible.

The cost of the delay was not just dollars. She had a potential buyer conducting informal due diligence on the business, and unregistered multi-state sales tax exposure is exactly the kind of liability that either kills a deal or gets used to renegotiate the purchase price downward at the worst possible time.

Our philosophy on nexus exposure is to quantify the full scope before responding to any single state, because states do not coordinate with each other and a scattershot response invites inconsistent positions that come back to hurt you later. We ran a full nexus study across all fifty states using three years of transaction-level sales data before drafting a single letter.

We considered simply registering going forward in the two states that had already sent notices and treating the rest as a wait-and-see problem. We ruled that out because economic nexus thresholds meant at least nine other states already had a live claim whether or not they had sent a notice yet, and voluntary disclosure terms are only available before a state contacts you. Waiting for more notices would have closed the door on the more favorable resolution path in those states.

For the two states that had already sent notices, voluntary disclosure was not available since they had already identified her, so we negotiated directly with each state's compliance division, which is a different process with a narrower set of outcomes than a VDA.

We built a nexus map using historical sales data pulled from Shopify and both marketplace channels, comparing gross and marketplace-facilitated revenue against each state's economic nexus threshold by year to establish the exact quarter nexus began in each of the eleven states. This mattered because voluntary disclosure look-back periods are typically limited to three or four years, and getting the trigger date wrong either overstates or understates the exposure being disclosed.

For nine of the eleven states, we filed voluntary disclosure agreement applications anonymously through each state's VDA program, which allowed us to negotiate the look-back period and penalty waiver before revealing the taxpayer's identity. All nine were accepted, limiting the look-back to either three or four years depending on the state and waiving penalties entirely in exchange for registration and payment of back tax plus interest.

For Texas and Pennsylvania, where notices had already been issued, we responded with actual transaction data instead of the states' estimated assessments, which reduced the proposed liability substantially in both cases, and we filed penalty abatement requests citing reasonable cause given the good-faith reliance on marketplace facilitator collection for the bulk of her sales.

We reconfigured her Shopify tax settings and connected Avalara for automated multi-state collection going forward, then registered her for sales tax permits in all eleven states and set up a monthly and quarterly filing calendar so remittances go out on time without her tracking due dates manually.

Total exposure across all eleven states was quantified at $146,000 in back tax and interest before any negotiation. Through the VDA process and the direct negotiations with Texas and Pennsylvania, $52,300 in penalties was abated, and the final negotiated liability came in well below the states' original estimated assessments.

With the exposure quantified, disclosed, and resolved rather than open-ended and unknown, her sale process moved forward on the original terms. The buyer's due diligence team was able to close out the sales tax question with documentation instead of treating it as an unresolved liability requiring a holdback.

Going forward, she collects and remits correctly in real time instead of finding out about a problem years later, and she has a filing calendar her bookkeeper follows every month instead of sales tax living entirely in her head.