Key takeaways
- Nexus is the legal threshold that creates a state tax obligation — once established, the company must file and pay taxes in that state.
- Post-Wayfair (2018), economic nexus rules create sales tax obligations based on revenue thresholds alone — no physical presence required.
- Remote employees create income tax, payroll tax, and often sales tax nexus in the employee's state — a consequence many founders missed during the remote work expansion.
- Undisclosed nexus liability is priced into deals: buyers either reduce the purchase price, require an escrow holdback, or demand a voluntary disclosure agreement before close.
- Voluntary Disclosure Agreements (VDAs) limit look-back periods and penalty exposure — they are the correct pre-deal remediation tool.
In this article
$200K–$800K
Typical undisclosed nexus liability in affected lower middle market deals
45
States with sales tax obligations post-Wayfair
50
States with income tax or franchise tax that can be triggered by nexus
2018
Year of South Dakota v. Wayfair decision (economic nexus established)
Before 2018, physical presence in a state was required before a company owed sales tax there. After the Supreme Court's South Dakota v. Wayfair decision, states could impose sales tax obligations based purely on economic activity — typically $100,000 of sales or 200 transactions in the state per year. For companies that sell across state lines (which describes most lower middle market businesses), the Wayfair decision potentially created sales tax obligations in dozens of states simultaneously.
Many founders never conducted a nexus analysis after Wayfair. They continued collecting sales tax in the states where they had offices or warehouses, but not in states where they only sold remotely. The liability has been accumulating since 2018 or 2019 when most states adopted economic nexus rules. In a sale process, the buyer's tax diligence will find it — and price it into the deal.
How nexus is created: three pathways
Nexus is created through three primary mechanisms, each with different tax implications.
Physical presence nexus: the traditional standard. If your company has an office, warehouse, employee, or significant property in a state, you have nexus there for sales tax, income tax, and payroll tax purposes.
Economic nexus (post-Wayfair): triggered by revenue or transaction volume thresholds. Most states have adopted a threshold of $100,000 in annual sales or 200 separate transactions in the state. Once exceeded, the company must register, collect, and remit sales tax. Some states have income tax economic nexus thresholds as well.
Employee nexus: a single remote employee working from a state creates nexus in that state for payroll tax purposes — and often for income tax and sales tax as well. The remote work expansion of 2020–2022 created nexus in new states for thousands of companies, most of which did not analyze the tax consequences at the time.
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Dollar math on typical nexus exposure
The financial exposure from undisclosed nexus varies significantly based on the company's revenue mix, the states involved, the look-back period, and whether penalties and interest apply.
Example nexus exposure calculation: A $20M revenue professional services company with customers in 25 states has been operating without a nexus analysis since Wayfair. In 2019, the company exceeded $100,000 of sales in 12 states where it was not collecting sales tax. The company also hired 3 remote employees in New York, Illinois, and Colorado in 2020 without registering for payroll and income tax. Gross sales tax exposure: 12 states at an average 7.5% rate on $8M of taxable services revenue per year = $600K/year x 4 years = $2.4M. Penalties at 25% = $600K. Interest at 5% per year = $480K over 4 years. Payroll and income tax in 3 states = $50K–$120K additional. Total gross exposure: $3.5M–$3.6M before any mitigation.
The example above is a worst case. Not all professional services are taxable in all states. The economic nexus threshold may not have been exceeded in all 12 states in all years. And a properly negotiated VDA can dramatically reduce the look-back period and eliminate penalties.
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Schedule a conversation →How buyers price undisclosed nexus liability
PE buyers conduct tax diligence specifically to identify undisclosed state tax obligations. Their tax diligence team will review state tax filings to identify where the company is registered and paying; compare that to where the company has revenue, employees, and property; identify the gap; and estimate the liability.
When nexus exposure is discovered during diligence (rather than disclosed by the seller), buyers typically: demand a purchase price reduction equal to the estimated liability, or require an escrow holdback equal to the estimated liability pending resolution post-close.
A buyer who discovers $400K of undisclosed nexus liability in diligence will not simply ignore it. At a 6x EBITDA multiple, that $400K of liability — properly reserved — represents a $400K dollar-for-dollar reduction in proceeds. There is no multiple expansion for resolving a tax liability; it comes directly off the seller's proceeds.
The difference between disclosed nexus (managed pre-close through VDA) and undiscovered nexus (found in diligence) is the difference between paying the actual tax liability with penalties waived and paying the actual tax liability plus penalties plus the buyer's margin of safety. Disclosed nexus that has been remediated through a VDA is a neutral deal item — no escrow, no price reduction, no retrade risk.
Voluntary Disclosure Agreements (VDAs)
A Voluntary Disclosure Agreement (VDA) is a program offered by most states that allows a company to come forward voluntarily to disclose and pay previously unfiled taxes in exchange for a limited look-back period and waiver of penalties.
VDA programs are the correct pre-deal remediation tool for undisclosed nexus liability. The key benefits: most states limit the look-back period to 3–4 years (vs. potentially unlimited look-back if the state initiates an audit), penalties are typically waived in full, and interest is reduced in some states.
Conduct a Nexus Study
Identify all states where nexus may exist (economic, physical, employee)
Determine Tax Obligations
For each nexus state, identify applicable taxes and compute estimated liability
Prioritize by Exposure
Focus first on high-exposure states with the largest uncollected amounts
Engage State Tax Counsel
File VDA applications through an attorney or tax advisor — anonymous submissions are often available
Negotiate VDA Terms
Most states respond within 60–90 days; negotiate look-back period and penalty waiver
File and Pay
Provide required back returns and payment; receive compliance confirmation
Register for Ongoing Compliance
Register for all required tax accounts in each state going forward
The timeline for a full VDA program for a company with exposure in 8–12 states is typically 4–6 months. Starting the process 12–18 months before a sale provides enough time to complete VDAs before the process launches, so the resolved liability can be presented as a managed item rather than an open risk.
How to conduct a nexus study before a process
A nexus study is an internal or advisor-led analysis of the company's state-by-state activities and their tax implications. The output is a comprehensive map of: where the company has nexus, what taxes are owed in each state, whether the company is currently registered and compliant, and what the estimated liability is for non-compliance.
The inputs to a nexus study: state-by-state revenue data for the past 4–6 years, a complete list of all employees (current and historical) with their work location, a list of all company locations (offices, warehouses, co-location facilities), and an inventory of company-owned or leased property in each state.
For companies with a mix of product and service revenue, the taxability analysis is more complex — not all products and services are taxable in all states, and the taxability rules vary significantly by state. Professional services are taxable in some states (Hawaii, New Mexico, South Dakota, others) and not in most. Software is taxable in most states but the rules vary by delivery method.
4–6 months
Time required for nexus study and VDA program
12 states
Typical number of states with undisclosed nexus in affected companies
$15K–$40K
Cost of nexus study and VDA filing with tax counsel
$200K–$800K
Range of net liability after VDA for typical affected company
FAQ: Multi-state tax nexus in M&A diligence
Frequently asked questions
Does Wayfair apply to B2B sales, or only B2C?
Wayfair applies to all sales, B2B and B2C. If a company sells $100,000 or more of taxable products or services to customers in a state, it has economic nexus there regardless of whether the customers are businesses or consumers. However, B2B sales may be subject to resale exemptions that reduce the taxable base.
We only have one remote employee in another state. Does that really create nexus?
Yes. A single employee working remotely from their home state creates nexus in that state for payroll tax purposes and often for income tax and sales tax purposes. The one-employee threshold is not a high bar, and the tax obligations are real.
If we complete a VDA, does that information become public?
VDA applications can be filed anonymously through a tax advisor in most states — the company's identity is not disclosed during the application process. Once the VDA is accepted and filed, the returns are part of the public record in some states, but the VDA agreement itself is typically confidential.
How does the buyer price nexus liability if we disclose it but have not remediated it?
Buyers will estimate the full liability (tax plus penalties plus interest) and apply a margin of safety (typically 110–125% of the estimate). They will request a dollar-for-dollar escrow holdback or price reduction equal to that amount. This is significantly worse than completing a VDA before the process.
What states are most aggressive about economic nexus enforcement?
California, New York, Illinois, and Texas are among the most aggressive in pursuing out-of-state sellers with economic nexus. These states have large populations and active audit programs targeting companies with substantial in-state revenue. If your company has significant sales in these states without being registered, the exposure is real and should be addressed first.
Work with Glacier Lake Partners
Conduct a Nexus Study Before Your Sale Process
A nexus study and voluntary disclosure program take 3–6 months — start before a process, not during diligence.
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Disclaimer: Financial figures and case studies in this article are illustrative, based on representative middle market assumptions, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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