Not all states are equal: The 10 trickiest states for filing sales tax

Sometimes the most difficult tasks in life are the most rewarding, and sometimes they’re simply the most difficult. With sales tax compliance, it’s the latter.

The fact is, not all states are equal when it comes to sales tax filing and remittance. For a variety of reasons, sales tax compliance in certain states takes more time and causes more headaches than sales tax compliance in others.

There’s no one reason why this is so. In many states, a variety of elements converge to create a perfect storm of complexity. These may include: frequent and abundant rate changes, specific filing and payment requirements, and expanded collection requirements.

Of the 45 states (plus the District of Columbia) that have a general sales tax, 10 stand out as being especially tricky for sales tax compliance: Arizona, California, Colorado, Florida, Illinois, Louisiana, Missouri, New York, Tennessee, and Texas. Two others have the dubious distinction of getting honorable mention: Alabama and Kansas.

To illustrate the knottiness, here are some examples. California stands out, in part, for having multiple filing schedules, special reporting requirements for each location or outlet, and optional local jurisdictions. Colorado is a home rule state where more than 70 local governments (municipal or county) administer their own local taxes on top of the state sales tax. Illinois also allows home rule, and — confusingly — it has a retailers’ occupation tax, a service occupation tax, and a gross receipts tax. And so on.

While bothersome (and time-consuming), these filing complexities have been around a long time. More recently, sales tax compliance in these states has been complicated by expanded nexus provisions.

Sales tax nexus is the connection between a taxing jurisdiction and a business that triggers a sales tax collection obligation for the business. It used to be based on physical presence alone. However, on June 21, 2018, the Supreme Court of the United States overruled the physical presence requirement in its decision in South Dakota v. Wayfair, Inc. The court determined a business’s “economic and virtual contacts” with a state, or economic nexus, could be sufficient to trigger a sales tax collection obligation.

Since that seminal decision, 46 states, Puerto Rico, and the District of Columbia have adopted economic nexus provisions requiring certain remote sellers to collect and remit sales tax. Missouri became the last of the 10 tricky states to embrace economic nexus; its law took efect January 1, 2023.

Now, difficulties associated with sales tax compliance in these states start with determining whether a sales tax collection obligation exists. If it does, businesses will likely need to devote extra resources to filing and remitting sales tax.

You don’t get extra points for being sales tax compliant in tricky states. You do have to siphon resources away from other tasks, and devote more time to getting sales tax compliance right — unless you outsource sales tax filing.

Avalara Returns files more than 1 million returns annually. For some companies, we take care of all returns in all states. For others, we only handle filing in troublesome states that use up the most time and create the most audit risk. You determine how much or how little Avalara should do for you; if you prefer to offload the troublemakers but handle the “easy” returns in house, you can.

Learn more about what makes sales tax compliance in some states particularly onerous in The Tricky 10: States with the most complex rules for filing sales tax returns.

This post was updated October 10, 2023.