If you’re starting or running a business that makes sales to the public, odds are you’ve encountered the term “sales tax nexus.” But if that term has you feel overwhelmed, don’t panic. Help is here.
Sales tax nexus refers to the connection between a business and a state that requires the business to collect and remit sales tax. In simple terms, a nexus determines where a business has tax obligations.
Nexus and sales tax is a vital part of business compliance; not managing these taxes properly can lead to severe financial penalties, reputational damage, and legal repercussions. Whether you run a brick-and-mortar store, sell online, or partner with online affiliates, you may need to collect sales tax in specific states based on your activities.
Understanding sales tax nexus is more important than ever in the post-Wayfair era. The 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. expanded the way states can define these tax obligations, making it easier for them to require remote sellers to collect sales tax. In this guide, we’ll break down the different types of sales tax nexus, explain state-specific rules, and share practical tips for staying compliant.
Sales tax nexus is a huge part of determining your tax responsibilities as a small business owner. Sales tax nexus essentially a link between your business and a state or jurisdiction that creates tax responsibilities. A sales tax nexus is created when a business has a sufficient connection, such as physical presence or economic activity, within a state. Without nexus, you generally don’t have to collect or remit sales tax in a state. However, once a nexus exists, you’re obligated to collect sales tax on taxable transactions in that state and send those payments to the appropriate tax authority.
For example, if your business operates a warehouse in New York, or your business meets specific sales thresholds in Texas, you likely have nexus in those states.
Nexus plays a critical role in determining where your business needs to register for sales tax and comply with state laws. Many businesses find this concept challenging, particularly as each state has different rules and definitions.
Businesses can establish a sales tax nexus in various ways. Depending on your operations, you might fall under one or more of these categories.
The criteria for establishing sales tax nexus include factors such as physical presence, economic activity, and affiliate relationships. Let’s walk through the common types of nexus.
Physical presence nexus is the traditional form of sales tax obligation. If your business owns or leases property, operates a storefront, or employs workers in a state, you likely have a physical presence there, which qualifies you under the physical presence nexus requirement. For instance, a South Carolina retailer with a warehouse in Georgia would probably need to collect and remit sales tax in both states. If you hire a remote worker or an independent contractor in another state, that may establish nexus, too.
This type of nexus applies even if you have limited business activity in the state. For example, storing inventory in a third-party warehouse or using a drop-shipper can mean that your business has a physical presence there, and as a result, you have a sales tax nexus in the state where that warehouse is located.
Every state has slightly different standards for what constitutes a physical nexus, so be sure to check the rules in each area you operate in.
Revenue generated in a state can create what’s called an economic nexus, meaning that meeting or exceeding certain sales or revenue thresholds can obligate out-of-state businesses to collect sales tax. This type of nexus doesn’t require a physical presence; it often affects remote sellers who operate online based in another state but make lots of sales there.
States set thresholds that businesses must meet before they’re obligated to collect sales tax. For example, South Dakota’s economic nexus threshold is $100,000 in sales annually, but thresholds vary across states.
The Wayfair decision in 2018 allowed states to enforce economic nexus laws, which has significantly impacted remote sellers. If your business exceeds these thresholds in a state, you must register, collect sales tax, and remit it compliantly. Many online retailers find themselves navigating economic nexus requirements in multiple states.
If you primarily operate through an online marketplace like Etsy, Amazon, or eBay, your sales tax requirements may look a bit different — even if you have a substantial number of sales in the state. That’s because many of these retailers will handle collecting and remitting sales taxes on behalf of their independent sellers. If that’s the case, you don’t also have to collect sales taxes for the sales on that retailer’s site.
You would, however, have to collect and remit sales taxes for qualifying purchases made outside of the retailer’s site. So if you operate on Amazon and from your own e-commerce site, you’ll still have sales tax responsibilities.
If you use these marketplaces exclusively or as part of a variety of sales avenues, make sure you do your research about your sales tax responsibilities for each site. That way you won’t overlook any of your sales tax requirements.
Affiliate nexus applies when your business has relationships with third parties or affiliates in a state that help promote or sell your products. For example, if a marketing partner or affiliate generates sales for your business in a specific state, that connection could create sales tax nexus. This is common in online advertising or influencer partnerships, where the affiliate’s activity ties your business to the state’s tax laws.
Click-through nexus is similar to affiliate nexus but focuses specifically on online referrals and advertising. If your business advertises through a third party and those ads result in sales from customers in a specific state, you might have click-through nexus. For example, an online retailer using New York-based affiliates who refer customers through click-through links would likely have nexus in New York. This rule aims to capture tax obligations arising from modern digital marketing practices.
Comparing the different types of nexus reveals how varied and complex these rules can be. Businesses often need to evaluate multiple factors to determine where they have tax obligations.
Determining whether your business has nexus involves assessing your operations, relationships, and sales data. Start by asking a few critical questions:
Answering “yes” to any of these questions could mean you have nexus there, so you should investigate further to learn that state’s particular requirements.
Tracking these factors can help identify where you have nexus. Tools like Avalara and TaxJar can also assist by monitoring your activities and alerting you when you approach state thresholds. Don’t forget that local sales tax rates may also apply, making these tools even more valuable. Regularly reviewing your sales data and business practices is crucial to avoid missing new tax obligations.
Since taxes can be complicated (especially across state lines), it’s highly recommended to consult with a tax professional when you have questions. They’ll be able to give you more detailed, customized guidance for your unique nexus situation.
Every state with a sales tax has its own nexus rules and thresholds, and these can vary widely. While some states set thresholds as low as $100,000 in annual sales, others, like California, require $500,000. States may also define different transaction limits, so you’ll need to understand the specific rules for each jurisdiction where you do business, as each threshold affects the overall tax obligations for businesses.
For some other examples, South Dakota’s economic nexus law requires businesses to collect sales tax if they exceed $100,000 in sales. By contrast, Texas has a higher threshold of $500,000 in sales. These variations continue across all 50 states. Understanding these differences is vital for compliance, especially if your business operates across state lines.
Once you’ve identified where your business has nexus, the next step is registering for sales tax in those states. This process starts with obtaining a sales tax permit, which is required before you can begin collecting tax. Applications are typically submitted through the state’s Department of Revenue (or similar office).
When registering, you’ll need to provide detailed information about your business. This includes your federal tax ID (EIN or SSN if you’re a sole proprietorship), business address, estimated sales in the state, and banking information for remitting taxes. Each state may require additional documentation, so it’s a good idea to review their specific registration requirements carefully.
Sales tax compliance is an ongoing responsibility. As your business grows, you may establish nexus in new states, so monitoring your activities is essential. Using automation tools like Avalara or TaxJar can make compliance more manageable by tracking sales, monitoring thresholds, and automating tax filings. These tools can also help keep track of the state sales tax rate in every location where you have nexus so you don’t have to track those details yourself.
It’s also important to review your sales data regularly to identify new nexus obligations early. Staying updated on changes to state laws and thresholds can help prevent compliance issues. If you find the process overwhelming, working with a tax professional who specializes in sales tax can provide additional support.
Sales tax nexus plays a critical role in determining where your business must collect and remit taxes. Whether your nexus stems from a physical presence, economic activity, or affiliate relationships, you’ll need to understand these connections. That way, you’ll be able to comply with sales tax nexus laws no matter what state you operate in. By identifying where you have nexus and using tools and strategies to manage your obligations, your business can stay on top of tax responsibilities and avoid potential penalties.
Navigating the complexities of sales tax may seem daunting, but with the right resources and planning, you can handle it with confidence.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Tax Information and Resources
Share
Related Articles
Start Your LLC Today