Confused by sales tax nexus? Our guide simplifies the rules, provides a state-by-state breakdown, and shows online businesses how to stay compliant.
online business owner, a question looms large: "Do I have to collect sales tax on my orders?" The answer is no longer simple. Thanks to a landmark 2018 Supreme Court decision, the rules of the game have changed dramatically, creating a new set of compliance challenges for remote sellers.
This guide is designed to demystify sales tax nexus, helping you understand your obligations in the modern digital landscape. We'll break down the concepts, provide a state-by-state overview, and give you the tools you need to stay compliant and avoid costly penalties.
What is Sales Tax Nexus? The Basics for Online Sellers
In simple terms, sales tax nexus is a legal term for the "connection" your business has to a state. If your business has a sufficient connection, that state can require you to collect and remit sales tax on sales made to customers within its borders.
Before 2018, the primary trigger for this connection was a physical presence—things like having a storefront, office, or employees in the state. However, the rise of e-commerce rendered this rule outdated.
Today, there are two main types of nexus:
- Physical Nexus: This traditional form still exists. You may have a physical nexus if your business has a physical location, employees, or even inventory stored in a third-party warehouse (like an Amazon FBA center) in a state.
- Economic Nexus: This is the modern, post-Wayfair standard. It's established when your business meets or exceeds a certain amount of sales or number of transactions in a state, regardless of your physical location.
The Wayfair Decision: The Game-Changer for Remote Sellers
The landmark 2018 Supreme Court case, South Dakota v. Wayfair, Inc., changed everything. The ruling allowed states to require out-of-state sellers to collect and remit sales tax based on their economic activity, not just a physical presence. This decision gave states the authority to establish economic nexus laws, creating a patchwork of different rules and thresholds across the country.
Your State-by-State Guide to Economic Nexus Thresholds
Navigating the various state regulations is the biggest challenge for online businesses. While most states have similar thresholds, there are key differences you need to know. The common standard is either a sales threshold of $100,000 in gross sales or 200 separate transactions into the state within the current or previous calendar year.
Here is a simplified breakdown of some key states and their economic nexus rules.
California: $500,000 in gross sales. No transaction count threshold.
Florida: $100,000 in gross sales. No transaction count threshold.
New York: $500,000 in gross sales AND 100 separate transactions. This is one of the few states that requires both.
Texas: $500,000 in gross sales. No transaction count threshold.
Illinois: $100,000 in gross sales or 200 separate transactions.
Washington: $100,000 in gross sales. No transaction count threshold.
Kansas: $100,000 in gross sales. Kansas is notable for having a simple monetary threshold and no transaction limit.
Note: Some states, like Alaska, have no statewide sales tax, but many local jurisdictions do. Delaware, Montana, New Hampshire, and Oregon have no sales tax at all.
The Crucial Role of Marketplace Facilitator Laws
For sellers on platforms like Amazon, Etsy, or eBay, there’s an additional layer of complexity. Many states have implemented marketplace facilitator laws which shift the sales tax collection responsibility from the individual seller to the marketplace platform itself.
This means that in states with these laws, the marketplace is responsible for collecting, filing, and remitting sales tax on your behalf for transactions that occur on their platform. This is a huge relief for many sellers and has simplified compliance significantly.
However, this does not mean you are off the hook entirely. If you also sell on your own website, through a Shopify store, or at a trade show, you are still responsible for your own direct sales. You must track your total sales across all channels to determine if you have met a state's nexus threshold.
What to Do After You Establish Nexus
So, you've checked your numbers and realized you have nexus in a new state. Now what? Taking these proactive steps is crucial for a smooth transition to compliance:
- Step 1: Register for a Sales Tax Permit. You must register with the state's department of revenue to get a sales tax permit before you can legally collect sales tax.
- Step 2: Set Up Your E-commerce Platform. Configure your website or marketplace settings to automatically calculate and collect the correct sales tax for sales made in that state.
- Step 3: File Your Returns. Stay organized by filing your sales tax returns on time, whether they are due monthly, quarterly, or annually.
FAQs: Answering Common Sales Tax Nexus Questions
What is the difference between physical nexus and economic nexus?
Physical nexus is a connection based on a physical presence (e.g., an office, a warehouse, or employees). Economic nexus is a connection based purely on your sales volume or transaction count within a state, regardless of your physical location.
Do my marketplace sales count towards my nexus threshold?
What if I don't collect sales tax after I've met a state's threshold?
Conclusion: Your Path to Sales Tax Compliance
The world of sales tax nexus is complex, but it's not unmanageable. By understanding the basic principles of economic nexus and keeping a close eye on your sales data, you can proactively manage your tax obligations. Staying compliant is not just a legal requirement—it’s a critical part of running a sustainable, long-term business.
This guide is for informational purposes only. Consult with a qualified tax professional to ensure compliance for your specific business.
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