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 -- even a single day)
• Independent contractors performing services on your behalf
• Delivery of goods in your own vehicles
• Installation or assembly services performed in the state

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

Economic Nexus Thresholds by State (Selected Major States)

State	Dollar Threshold	Transaction Threshold	Measurement Period
California	$500,000	None	Current or prior year
Texas	$500,000	None	Prior 12 months
New York	$500,000	100 transactions	Prior 4 quarters
Florida	$100,000	None	Prior calendar year
Illinois	$100,000	200 transactions	Prior 12 months
Pennsylvania	$100,000	None	Current or prior year
Ohio	$100,000	200 transactions	Current or prior year
Georgia	$100,000	200 transactions	Current or prior year
North Carolina	$100,000	200 transactions	Current or prior year
Michigan	$100,000	200 transactions	Current or prior year
Washington	$100,000	None	Current or prior year
Colorado	$100,000	None	Current or prior year

Important: Thresholds change. Check each state's department of revenue website for the current figures. Several states have eliminated their transaction-count thresholds, leaving only dollar 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, and some municipalities in Montana have resort taxes.

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
• SaaS (Software as a Service) is one of the most confusing categories -- roughly half of states with sales tax consider SaaS taxable, and rules are evolving rapidly

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

Taxability Quick Reference

Product/Service	Generally Taxable?	Key Exceptions
Physical goods	Yes (most states)	Groceries exempt in many states
Clothing	Yes (most states)	Exempt in PA, NJ, MN, NY (under $110/item)
Digital downloads	Varies	Not taxable in CA, FL, MO
SaaS	Varies (about 50/50)	Complex; check each state
Professional services	Usually no	TX, NM, HI, SD tax many services
Construction/repair	Varies	Some states tax labor, some do not
Food (grocery)	Varies	Exempt in 30+ states; taxed in AL, MS, OK at full or reduced rate
Prepared food/restaurants	Yes (most states)	Rate sometimes differs from general rate

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

Step-by-Step: Registering in a New State

1. Go to the state's department of revenue website
2. Apply for a sales tax permit (some states call it a seller's permit, sales tax license, or certificate of authority)
3. Most states offer free online registration; processing takes 1-10 business days
4. You will receive a permit number and filing instructions
5. Begin collecting sales tax on the date specified by the state (some make it retroactive to when you hit the nexus threshold)
6. Set up filing reminders for the assigned schedule (monthly, quarterly, or annual)

Never collect sales tax in a state before you have a valid permit. Collecting tax without remitting it is illegal in every state.

State Sales Tax Rates

Combined state and average local rates vary significantly. Here are the highest and lowest:

States with Highest Combined Sales Tax Rates (State + Average Local)

State	State Rate	Avg Local Rate	Combined Rate
Tennessee	7.00%	2.55%	9.55%
Louisiana	4.45%	5.07%	9.52%
Arkansas	6.50%	2.97%	9.47%
Washington	6.50%	2.89%	9.39%
Alabama	4.00%	5.29%	9.29%

States with Lowest Sales Tax Rates

State	State Rate	Avg Local Rate	Combined Rate
Oregon	0%	0%	0%
Montana	0%	0%	0%
New Hampshire	0%	0%	0%
Delaware	0%	0%	0%
Alaska	0% (state)	1.82% (local)	1.82%

Destination vs. origin sourcing: Most states use destination-based sourcing, meaning you charge the tax rate at the buyer's location. A few states (Texas, Arizona, Ohio, Pennsylvania, and others) use origin-based sourcing for in-state sales, meaning you charge the rate at your business location. For interstate sales, all states use destination-based sourcing.

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.

What Marketplace Facilitator Laws Mean for Your Business

• Sales through Amazon, Etsy, eBay, Walmart.com: The marketplace collects and remits sales tax for you in states with facilitator laws (virtually all states with sales tax)
• Sales through your own website: You are responsible for collecting and remitting sales tax in states where you have nexus
• Sales through direct invoicing: You are responsible
• Wholesale sales: Generally exempt from sales tax if you collect a resale certificate from the buyer

Reporting considerations: Even though marketplaces handle collection, you may still need to include marketplace sales in your sales tax filings for some states. Marketplace sales also count toward economic nexus thresholds in many states. Consult with a sales tax professional about your specific reporting obligations.

Sales Tax for E-Commerce Businesses

E-commerce businesses face unique sales tax challenges because they typically sell to customers in many states simultaneously. Here is a practical approach:

For Small E-Commerce Businesses (Under $500K Revenue)

1. Register in your home state first (you always have nexus where you are located)
2. Track sales by state monthly using your e-commerce platform's reporting
3. When you approach the $100,000 threshold in any state, register and begin collecting
4. Use your e-commerce platform's built-in tax calculation (Shopify, WooCommerce, BigCommerce all offer this)
5. File returns on the required schedule in each registered state

For Growing E-Commerce Businesses ($500K+ Revenue)

1. Invest in automated sales tax software (TaxJar, Avalara, or Vertex)
2. These tools automatically calculate the correct rate for every transaction, file returns, and track nexus thresholds
3. Cost: $200-$500+/month depending on transaction volume
4. The investment pays for itself by avoiding penalties and saving dozens of hours monthly

Sales Tax Software Comparison

Platform	Starting Price	Best For	Key Feature
TaxJar	$19/month	Small to mid-size e-commerce	AutoFile in all states
Avalara AvaTax	Custom pricing	Mid to large businesses	Deep ERP integrations
Vertex	Custom pricing	Enterprise	Complex multi-state compliance
Shopify Tax	Included with Shopify	Shopify merchants	Native integration

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. Amazon provides an Inventory Event Detail report that shows where your inventory is stored.

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. In some states, there are over 10,000 distinct tax jurisdictions with different rates.

Not Collecting Resale Certificates

If you sell to other businesses that resell your products, they should provide you with a resale certificate (also called an exemption certificate). This exempts the sale from sales tax. Without a valid certificate on file, you must charge sales tax. Keep resale certificates organized -- if audited, you need them.

Applying the Wrong Sourcing Rules

Charging your local tax rate to out-of-state customers is a common error. For interstate sales, you must charge the rate at the buyer's delivery address (destination-based sourcing). This requires looking up the combined state, county, city, and special district rate for the buyer's location.

Sales Tax Audit Risk and Preparation

State auditors focus on businesses with high sales volume, multiple nexus states, and a history of late or inaccurate filings. If you are audited:

• The auditor will review your sales records, exemption certificates, and tax returns
• They will compare reported taxable sales to your actual sales data
• Missing exemption certificates mean those sales will be treated as taxable
• The lookback period is typically 3-4 years (some states can go back further)

Keep organized records: sales by state, exemption certificates, tax returns filed, and proof of tax collected and remitted. Digital records are acceptable.

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 (typically 3-4 years). Consult a sales tax professional before entering into a VDA.

VDA Benefits vs. Self-Registering

Factor	Voluntary Disclosure Agreement	Self-Registration
Lookback period	Limited (typically 3-4 years)	Full statute of limitations
Penalties	Typically waived or reduced	Full penalties may apply
Interest	Usually still owed	Full interest owed
Audit risk	Lower (already resolved)	Retroactive audit possible
Professional help needed	Recommended (CPA or sales tax attorney)	Can do yourself

Important: Once you register in a state without a VDA, the state may retroactively assess tax, penalties, and interest for the entire period you had nexus. A VDA limits this exposure. It is almost always worth the professional fee ($1,000-$3,000 per state) to negotiate a VDA if you have significant back exposure.

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.

Sales Tax Exemptions and Resale Certificates

Not every sale is taxable. Understanding exemptions can prevent you from over-collecting (which creates liability) and ensure you properly document exempt sales (which protects you in an audit).

Common Sales Tax Exemptions

Exemption Type	How It Works	Documentation Required
Resale/wholesale	Buyer intends to resell the item	Valid resale certificate from buyer
Nonprofit organizations	Buyer is a qualifying 501(c)(3)	Exemption certificate from the nonprofit
Government purchases	Buyer is a government entity	Government exemption certificate or purchase order
Manufacturing equipment	Equipment used directly in manufacturing	Exemption certificate + state-specific form
Agricultural	Items used in farming/agriculture	Agricultural exemption certificate
Interstate commerce	Goods shipped to buyer in another state (in some states)	Proof of out-of-state delivery

Managing Resale Certificates

If you sell to other businesses that resell your products:

• Collect a valid resale certificate before or at the time of the first exempt sale. A certificate received after an audit does not retroactively exempt the sale in most states.
• Verify the certificate is properly filled out: buyer's name, address, state tax ID number, signature, description of items being purchased for resale, and a statement that the items are purchased for resale.
• Certificates do not expire in many states, but some states require renewal every few years. Check each state's rules.
• Keep certificates on file and organized by customer. If audited, you must produce them quickly.
• If a buyer uses a resale certificate fraudulently (they claim resale but actually use the item), the buyer is liable for the tax -- not you, as long as you accepted the certificate in good faith.

Sales Tax for Service-Based Businesses

If you sell services rather than products, your sales tax obligations depend heavily on the state. Most states do not tax professional services (consulting, accounting, legal), but many states tax specific services:

Service Category	States That Tax It (Examples)
Repair and maintenance	TX, OH, CT, NM, HI, SD
Cleaning/janitorial	TX, OH, CT, NM, HI
Landscaping	TX, CT, NM, HI, SD
SaaS (Software as a Service)	TX, NY, PA, CT, OH, TN, and ~20 others
Data processing	TX, CT, OH, NM
Personal care (hair, nails)	CT, NM, HI, SD
Construction labor	AZ, HI, NM, SD, WV
Advertising	HI, NM, SD
Marketing/PR	HI, NM, SD

SaaS is the fastest-evolving area of sales tax. States are increasingly treating cloud-based software subscriptions as taxable. If you sell SaaS, monitor legislative changes in every state where you have nexus. The rules are changing annually.

Building a Sales Tax Compliance Calendar

To stay organized across multiple states, create a compliance calendar:

Monthly Filing States (Higher Volume)

File returns and remit tax by the 20th of the following month (varies by state). States typically assign monthly filing to businesses collecting over $100-$500 in sales tax per month.

Quarterly Filing States (Moderate Volume)

File returns and remit tax within 20-30 days after the end of each quarter. Common for businesses collecting $100-$300 per month in a state.

Annual Filing States (Low Volume)

File once per year, typically by January 20 or January 31 for the prior year. Assigned to businesses collecting minimal sales tax in a state.

Important: Even if you had zero taxable sales in a filing period, you must still file a "zero return" in most states where you are registered. Failing to file zero returns can result in estimated assessments, penalties, and loss of your sales tax permit.

The True Cost of Sales Tax Non-Compliance

Many small businesses ignore sales tax obligations because the amounts seem small. Here is why that is a costly mistake:

Scenario: An online seller does $200,000 in annual sales across 15 states over 3 years. They never registered for or collected sales tax.

• Average sales tax rate across states: 7%
• Tax that should have been collected: $200,000 x 7% = $14,000/year x 3 years = $42,000
• Penalties (average 10% of uncollected tax): $4,200
• Interest (average 6% over 3 years): approximately $3,780
• Total exposure: approximately $49,980

The seller is personally liable for this amount even though they never collected it from customers. You cannot go back to customers and collect sales tax retroactively. This exposure is why proactive compliance -- and VDAs when you discover past non-compliance -- is critical.