Sales tax nexus for online sellers, explained

For most of the internet's history, you only had to collect sales tax in states where you had a physical presence. That changed in 2018, when the U.S. Supreme Court decided South Dakota v. Wayfair and allowed states to require collection based on economic activity alone. Every state with a statewide sales tax now has an economic nexus rule.

If you sell products online — or certain digital goods and services — this affects you well before you feel like a "multi-state business."

What nexus means

Nexus is the legal connection between your business and a state that gives the state the right to require you to collect its sales tax. Once you have nexus, you generally must register with the state, collect tax on taxable sales to customers there, file returns and remit what you collected.

Sales tax is technically the customer's tax, but if you should have collected it and didn't, the state can assess it against you — out of your own margin.

Economic nexus thresholds

Each state sets its own threshold for remote sellers. The most common is $100,000 in sales into the state over the current or previous calendar year. Some states also count the number of transactions — 200 was common — though a growing number have dropped the transaction test. A few large states use higher dollar thresholds, such as $500,000 in California and Texas. New York uses $500,000 combined with 100 transactions.

Points that trip people up:

• What counts toward the threshold varies. Some states count gross sales, others only taxable or retail sales, and some include marketplace sales even when the marketplace collects the tax.
• The measuring period varies — calendar year, prior 12 months or state fiscal year.
• Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Alaska has local sales taxes, and many of its localities have their own remote-seller rules.
• What's taxable differs. Clothing, food, software, SaaS and digital downloads are taxed differently from state to state.

How marketplaces change the picture

Every state with a sales tax now has a marketplace facilitator law. If you sell through Amazon, Etsy, eBay or Walmart Marketplace, the marketplace generally calculates, collects and remits sales tax on those sales for you.

That doesn't necessarily mean you're done. Sales through your own Shopify or WooCommerce store aren't covered, and in some states, marketplace sales still count toward your threshold — so marketplace volume can create an obligation for your direct sales. Some states also still expect marketplace sellers to register or file.

Physical nexus still exists

Economic nexus added a new trigger; it didn't remove the old ones. You can still have nexus because of:

• An office, store or warehouse in the state
• Inventory stored in the state — including inventory placed in fulfillment centers such as Amazon FBA warehouses
• Employees or, in some states, contractors working there
• Attending trade shows and making sales, in certain states

Physical nexus generally has no dollar threshold. FBA sellers can have physical nexus in many states without realizing it.

Getting compliant

1. Run a nexus study. Pull sales by state for the last several years, compare them to each state's thresholds and look for physical presence.
2. Register before you collect. Collecting tax without a permit is itself a problem in most states.
3. Set up collection in your checkout with correct product tax codes.
4. Build a filing calendar. States assign monthly, quarterly or annual filing based on volume, and missed zero-dollar returns still draw penalties.
5. Address past exposure. If you crossed thresholds in earlier years, a voluntary disclosure agreement usually limits the look-back period and waives penalties in exchange for coming forward before the state contacts you.
6. Keep exemption certificates for wholesale and other exempt sales.

Sales tax is separate from income tax, but they meet in one place: your books. Our multi-state service tracks sales by state every month, so you'll know you're approaching a threshold before you cross it.