In this guide, we’ll explain how sales tax obligations for multi-channel sellers can evolve and give you some tips on how to remain compliant as your business grows and thrives.
For a primer on sales tax filing, check out What is Sales Tax?.
What is sales tax nexus?
Since South Dakota v. Wayfair in 2018, out-of-state retailers selling products online need to collect sales tax in states where they have sales tax nexus.
“Nexus” is just a fancy way of saying that your business has a significant enough connection to a state that you should collect and remit sales tax from buyers in that state. It’s often based on an amount of sales called an “economic nexus threshold.”
In a state’s mind, you—the merchant—use their roads and other infrastructure to run your business. They expect you to help them out by collecting sales tax from your buyers to remit to the state.
Sales tax is the main form of revenue for many states, so it stands to reason that state tax laws include as many merchants as possible in order to collect more sales tax revenue for the state.
As a seller with a growing business, some of your common business activities may be creating nexus in a state without you even realizing it! Let’s dig in.
Common factors that create sales tax nexus
Since sales tax is governed at the state level, each state can legislate its own definition of sales tax nexus. For example, Florida’s sales tax nexus is a sales threshold. Businesses with more than $100,000 in sales in a calendar year must collect and remit sales tax. In California, the sales threshold for sales tax nexus is $500,000 in a calendar year.
Here are some of the factors that most states consider to create a nexus:
Physical presence: Whether you sell products from a laptop on your kitchen table, a downtown office, or a warehouse in an industrial park, a physical presence or location creates a sales tax nexus. This is why you’ll always have home state nexus.
Personnel: An on-site employee, contractor, salesperson, or installer usually creates sales tax nexus. (Though there are some exceptions when it comes to contractors creating sales tax nexus.)
Inventory: Keeping a “stock of goods” in a warehouse in a state often creates sales tax nexus. Inventory makes nexus tricky for people who sell through Fulfillment by Amazon or another third-party program where inventory is stored around the country.
Affiliates: A third-party affiliate who sends referrals to your store in exchange for a cut of the proceeds creates sales tax nexus in some states. This is one of the newer ways that states have found to create nexus.
Drop Shipping: If you have your distributors ship items directly to your customers, you’re in a drop shipping relationship. Depending on the terms of the relationship, you may be on the hook for sales tax. As a drop shipper, you’re known as a “remote seller” or “marketplace facilitator.”
Temporarily Doing Business: Each state is different, but in some states, attending a trade show, craft fair or otherwise conducting temporary business in that state could make you liable for sales tax for the entire year. Generating enough sales to trigger a sales tax nexus without maintaining a physical presence in the state is called an “economic nexus.” You can read more here about sales tax and temporarily doing business.
Here’s a list of what every state’s code of laws has to say about factors that create sales tax nexus.
What to do if you have sales tax nexus
As you can see from the list above, many of the factors that create sales tax nexus are the same business activities that will help your ecommerce business grow and thrive.
Here’s what you’ll need to do if you find that you have a sales tax nexus in a state other than your home state.
Register for a sales tax permit in that state
Head over the state’s Department of Revenue (or other taxing authority) website and register for a sales tax permit. Keep in mind that, as a seller based out of state, you may be asked to register for a “use tax” permit instead.
In most cases, unless you do have a physical location in the remote state, you should use your business’s main address when registering for a sales tax permit. However, sometimes that state’s online sales tax registration system won’t let you complete the application with an out-of-state address. In this case, you can generally give the state’s taxing authority a call and have them override it. In other cases, they may ask you to complete a paper registration instead.
Collect sales tax from buyers in that state
Once you have nexus in a state, be sure to collect sales tax from all buyers in that state. It’s especially important for sellers to make sure that all channels are set up to collect sales tax.
It’s easy to go wrong at this stage in your business.
For example, say you sell your awesome wireless headphones out of your retail store in California and through your Magento store online. Then you decide to expand to another channel with Fulfillment by Amazon (FBA).
With FBA, you may end up with inventory stored in some or all of the states with Amazon fulfillment centers. This likely creates an inventory nexus for your business in new states. Not only do you need to set up your FBA account to collect sales tax in all the states where you have nexus, you also need to set up your Magento-powered store to collect state sales tax from your buyers.
If you’re a seller in multiple states and worry that you aren’t collecting the right amount of sales tax, TaxJar’s “Expected Sales Tax Due” report can help you pinpoint the problem and ensure you’re collecting the correct amount of sales tax from all the right customers.
Double-check that you’re collecting the correct sales tax rate
Most of the time, if you collect sales tax in one state but your business is based in another, then you’ll collect using destination-based sourcing. What does that mean?
Long story short, some states require in-state sellers to collect sales tax based on the tax rate of their business location. However, a majority of states are “destination-based,” meaning they require merchants to collect sales tax based on the buyer’s ship-to location. For the most part, if you have a sales tax nexus in a state but are not based in that state, then you should collect sales tax based on the local sales tax rate at your buyer’s ship-to location.
Check out this blog post to learn a lot more about origin-based and destination-based sales tax collection.
File sales tax returns in your nexus state(s)
When you register for your sales (or use) tax permit in the new state, you’ll be assigned a filing frequency. Once again, keep in mind that every state is a little different.
While California may have you accustomed to filing sales tax on the last day of every month, you may find that South Carolina only wants to hear from you every quarter on the 20th of the month. Be sure to set reminders for yourself to pay sales tax to the right states on the right due dates!
What to do when you no longer have nexus in a state
Sometimes your business decisions—such as letting an employee go or moving your headquarters—will mean that you no longer meet the collection requirements in a particular state. If this should occur, you should first notify the state. As you might expect, the notification process for every state is a little different, but you can start by giving their state taxing authority a call. (Here’s a handy list of the best way to talk to a person about sales tax in every state.)
From there, some states may require written notice, while others will just want you to check a box to the effect of “this is my final filing” on your last sales tax return.
You should also be aware of the concept of “trailing nexus.” Some states consider you to have nexus for some time, even after you’ve stopped your nexus-creating activity in the state. Those states reason that some business activities (such as having a salesman do demonstrations in the state) may create sales for you even after you’ve ceased activity in the state. Trailing nexus can be a bit of a fuzzy concept, and it’s another reason why you should contact the state’s taxing authority before you stop collecting sales tax from buyers in that state.
Check out this post for a lot more about what to do when you no longer have sales tax nexus.
How to automate sales tax reporting and filing
As your business grows, the actual process of reporting and filing sales tax also grows more complex.
Calculating the amount of sales tax you collect from sellers in multiple states and on multiple channels can involve pulling and combining data from different reports. To make matters more confusing, the vast majority of states rely on you, the seller, to divide up how much you’ve collected by state, county, city, and other special taxing jurisdiction.
Depending on your needs, the act of overseeing sales tax collection and filing might not be too much of a hassle. But if you find that your sales tax collection needs are more robust, or if they’re simply costing you too much time and stress, consider using TaxJar or another online solution to automate the process.
Watching your business scale is a beautiful thing, but a bigger business usually means a bigger pile of administrative tasks to deal with. We hope this guide has helped you put a lid on sales tax so you can get back to focusing on the important aspects of your ecommerce business.
This is a guest post by Mark Faggiano, CEO and Founder of TaxJar. TaxJar is a service built to make sales tax simple for ecommerce sellers. Start your 30-day-free trial of TaxJartoday, and eliminate sales tax compliance headaches from your life.