Sales and use tax compliance is one of the most intricate areas of business finance. The rules vary by state, industry, and even by the type of transaction, leaving many organizations exposed to unexpected liabilities. While companies often assume they are compliant, even small oversights can snowball into significant penalties during an audit.

Whether you’re a business owner, controller, or tax professional, understanding these pitfalls can help you avoid costly mistakes and maintain smoother compliance operations. Below are ten of the most common sales and use tax errors businesses make—and how to prevent them.

1. Misunderstanding Nexus Rules

One of the biggest compliance pitfalls is misunderstanding or overlooking nexus—the connection that determines whether your business must collect and remit sales tax in a state.

In the past, physical presence such as an office, warehouse, or employee triggered nexus. Today, economic nexus laws apply even without physical presence. If your company exceeds a state’s revenue or transaction threshold, you may be required to register, collect, and remit taxes there.

Failing to track economic nexus across states can result in years of uncollected tax, interest, and penalties.

2. Incomplete or Invalid Exemption Certificates

Many businesses make exempt sales—for example, to resellers or manufacturers—but fail to collect or maintain proper exemption certificates.

Missing or expired certificates are one of the most common reasons companies fail audits. States can disallow exempt sales without valid documentation, even if the customer was legitimately exempt.

To avoid this, maintain a centralized, regularly updated system for collecting and verifying exemption certificates. Review them annually and ensure they meet each state’s specific format and requirements.

3. Misclassifying Products or Services

Another frequent error lies in incorrectly categorizing taxable and non-taxable products or services. For example, software can be exempt in one state if custom-developed but taxable in another if delivered electronically. Similarly, maintenance contracts, SaaS platforms, or digital downloads are subject to varying tax treatments.

Failure to stay updated on product taxability rules can result in either under-collecting tax (and owing it later) or over-collecting, which can damage customer relationships and create refund obligations.

4. Overlooking Use Tax Obligations

Businesses often focus on sales tax collection but forget their use tax responsibilities. Use tax applies when sales tax wasn’t charged by the vendor—such as when purchasing goods from an out-of-state supplier or using items from inventory internally.

If your company buys taxable items without paying sales tax, it must self-assess and remit use tax. Many audits reveal unreported use tax liabilities accumulated over several years.

Regularly reviewing vendor invoices and purchase orders can help identify and address these obligations before they become a problem.

5. Not Tracking Tax Law Changes

Tax laws evolve constantly, and staying compliant requires ongoing attention. States frequently change rates, introduce new taxable categories, or redefine exemptions.

For instance, digital services, SaaS platforms, and cloud computing are now taxable in several states that previously exempted them. If your company doesn’t monitor these updates, you could be applying outdated tax rates or rules—leading to underpayment or overpayment.

Establishing a compliance review schedule or using automated software that updates rates and rules can help avoid this pitfall.

6. Ignoring Marketplace and Third-Party Seller Rules

With the rise of e-commerce, states have implemented marketplace facilitator laws, requiring platforms like Amazon, Etsy, or eBay to collect and remit sales tax on behalf of sellers. However, many sellers mistakenly assume this covers all their obligations.

If you sell through multiple channels—for example, your website and a marketplace—you may still have tax responsibilities for non-facilitated sales. Failing to distinguish between the two can cause misreporting or double taxation.

Review each marketplace’s policies and ensure your filings reflect accurate reporting.

7. Failing to Register in All Required Jurisdictions

Businesses expanding across states often forget to register for sales tax in every jurisdiction where they have nexus. This can happen after hiring remote employees, opening distribution centers, or reaching sales thresholds in new states.

Unregistered activity doesn’t go unnoticed. Many states cross-check business licenses, income tax filings, and third-party data to identify unregistered sellers.

Registering proactively, even if late, can often minimize penalties and demonstrate good faith compliance.

8. Inaccurate Filing and Remittance

Even when businesses correctly collect tax, administrative errors can occur in filing or remitting it. Late filings, missed deadlines, or reporting to the wrong jurisdiction can all result in penalties.

Multi-state businesses face additional challenges due to different filing frequencies, online portals, and reporting formats. Automating filings or outsourcing compliance to experts can help ensure deadlines and accuracy are maintained across all states.

9. Poor Recordkeeping

Sales and use tax audits typically cover three to four years of records. If documentation is incomplete or inconsistent, states can estimate liabilities—often to your disadvantage.

Keep organized, detailed records of invoices, exemption certificates, tax returns, and correspondence. Electronic recordkeeping systems can streamline audits and reduce time spent gathering documents.

Good records not only support compliance but also make refund claims or audit defenses much more efficient.

10. Failing to Conduct Internal Reviews

Businesses often wait until an audit is announced to review their sales and use tax compliance—a costly mistake. Regular internal audits can uncover overpayments, underpayments, or procedural gaps before they attract state attention.

Conducting periodic self-assessments helps identify areas for improvement, validate exemption certificates, and ensure nexus compliance. Many companies also find opportunities for refunds by identifying overpaid taxes during these reviews.

Making this a routine part of your financial process can prevent future penalties and strengthen overall compliance.

Final Thoughts

Sales and use tax compliance is not a one-time task—it’s a continuous process that evolves alongside your business operations and state regulations. Small mistakes, whether administrative or technical, can lead to significant financial consequences if ignored.

By understanding these common pitfalls—from nexus missteps to poor documentation—businesses and tax professionals can take proactive measures to stay compliant and avoid penalties.

Investing in internal controls, training, automation, and periodic compliance reviews can go a long way in minimizing risk. Ultimately, a proactive approach to sales and use tax compliance doesn’t just protect your bottom line—it strengthens your financial integrity and builds trust with customers, auditors, and stakeholders alike.