Your online store takes off, orders roll in from across the country, and then a letter arrives from a state you've never set foot in, asking about sales tax. Since 2018, states can require you to collect based on sales alone. Here's how it works, and how to get ahead of it before the letter comes.
Two ways to create nexus
Physical nexus still applies. Offices, warehouses, employees, inventory, and sometimes even traveling salespeople can create an obligation to collect.
Economic nexus is based on how much you sell into a state. Every state with a sales tax now has a threshold. Many use $100,000 in annual sales, and some also count the number of transactions. Others set the bar higher. California and Texas, for example, use $500,000.
What counts depends on the state
- What's taxable varies. Software as a service, digital products, and services are taxed in some states and exempt in others.
- Marketplace sales are handled differently. Platforms like Amazon generally collect tax on sales they facilitate, but some states still count those sales toward your threshold.
- The measurement period varies. Some states look at the prior calendar year, some at the current year, and some at a rolling 12 months.
How to stay ahead of it
- Map your sales by state. Your sales records show where customers are located.
- Track thresholds monthly. Fast-growing businesses can cross a threshold midyear.
- Confirm what's taxable. Check how each state treats your specific products or services.
- Register before you collect. Collecting tax without a permit creates its own problems.
- File on schedule. Once registered, you'll file returns monthly, quarterly, or annually, even in periods with no sales.
Sales tax software can calculate rates and file returns automatically once you're registered, which is especially helpful when you're collecting in many states.
If you're already behind
Many businesses discover they've had nexus for a while. Most states offer voluntary disclosure agreements, which generally limit how many years back you owe and reduce or waive penalties when you come forward before the state contacts you. Addressing it early is almost always less expensive than waiting.
We'd check thresholds before launching on a new marketplace or in a new region, not after. If we found we were already behind, we'd come forward voluntarily. It's almost always the least expensive way out.