Sales Tax Nexus: When and Where You Must Collect

Sales Tax Nexus: When and Where You Must Collect

Sales tax is a state and local obligation, not a federal one. But it trips up small business owners constantly -- especially those who sell online or across state lines. The concept of "nexus" determines where you are required to collect and remit sales tax, and the rules changed dramatically in 2018.

What Is Sales Tax Nexus

Nexus is a legal term that means you have a sufficient connection to a state that requires you to collect and remit sales tax there. If you have nexus in a state, you must register for a sales tax permit, collect tax on taxable sales to customers in that state, and remit the tax to the state on the required schedule.

There are two types of nexus:

Physical Nexus

You have physical nexus in a state if you have a physical presence there. This includes:

• An office, store, warehouse, or other place of business
• Employees or sales representatives working in the state
• Inventory stored in the state (including FBA inventory in Amazon warehouses)
• Property or equipment in the state
• Temporary physical presence (trade shows, pop-up shops)
• Independent contractors performing services on your behalf

Economic Nexus

After the Supreme Court's 2018 decision in South Dakota v. Wayfair, states can also establish nexus based on your economic activity in the state -- even if you have no physical presence there.

Most states have adopted economic nexus thresholds. The most common threshold is $100,000 in sales or 200 transactions in the state during the current or prior calendar year. However, thresholds vary by state:

• Some states use only a dollar threshold (e.g., $100,000 in sales)
• Some use only a transaction threshold (e.g., 200 transactions)
• Some use either/or (you trigger nexus by meeting either threshold)
• A few states have higher or lower thresholds

States Without Sales Tax

Five states do not have a state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, some localities in Alaska do impose a local sales tax.

What Is Taxable

Sales tax rules vary significantly by state. In general:

• Tangible personal property (physical goods) is taxable in most states
• Digital products (software, downloads, streaming) are taxable in many states but not all
• Services are generally not taxable in most states, but the rules vary widely -- some states tax specific services like repair, cleaning, or SaaS
• Food and clothing are exempt or taxed at a reduced rate in some states

You must research the rules for each state where you have nexus to determine what is taxable.

How to Determine Your Nexus Obligations

1. Identify states where you have physical presence: offices, employees, inventory, property
2. Track your sales by state: total revenue and transaction count
3. Compare against each state's economic nexus threshold: check each state's department of revenue website for current thresholds
4. Register for a sales tax permit in each state where you have nexus
5. Collect the correct tax rate: rates vary by state, county, city, and special district -- use the customer's shipping address for the rate
6. File and remit on schedule: monthly, quarterly, or annually depending on the state and your sales volume

Marketplace Facilitator Laws

Most states now have marketplace facilitator laws that require platforms like Amazon, Etsy, eBay, and Shopify to collect and remit sales tax on behalf of third-party sellers. If you sell through a marketplace facilitator, the platform handles sales tax collection for sales in states with these laws.

However, you are still responsible for collecting sales tax on sales made through your own website or other direct channels.

Common Mistakes

Not Tracking Amazon FBA Inventory Locations

Amazon distributes your inventory across multiple fulfillment centers. Each state with your inventory creates physical nexus. If you use FBA, you likely have nexus in many more states than you realize.

Ignoring Economic Nexus Thresholds

Many small businesses assume sales tax is only an issue if they have a physical location. Post-Wayfair, selling $100,000 worth of goods to customers in a state -- even from your home office in another state -- can trigger nexus.

Collecting Tax Without a Permit

Never collect sales tax in a state where you do not have a valid sales tax permit. Collecting tax without remitting it is illegal. Register first, then begin collecting.

Failing to Charge the Correct Rate

Sales tax rates are not uniform within a state. The rate depends on the buyer's location. Use automated sales tax software (Avalara, TaxJar, or similar) to calculate the correct rate for each transaction.

Getting Compliant

If you discover you should have been collecting sales tax in states where you were not, most states offer a Voluntary Disclosure Agreement (VDA) program. A VDA allows you to register and come into compliance, often with reduced penalties and a limited lookback period. Consult a sales tax professional before entering into a VDA.

Sales tax compliance is an ongoing obligation. As your sales grow and reach new states, you must continuously monitor your nexus footprint and register in new states as thresholds are met.