Sales Tax Nexus: When an Online Business Must Collect Sales Tax

Your online store is growing, and orders are coming in from 30 states. Then a fellow seller mentions they just registered for sales tax in Texas, and you realize you have never collected tax outside your home state. Do you owe it? Since when? And what about the sales you made on Amazon?

The answer depends on nexus: the connection to a state that obligates you to register, collect and remit its sales tax. Since 2018, that connection no longer requires a warehouse or office in the state. Selling enough into a state can be enough.

This guide explains physical and economic nexus, how thresholds are measured, how marketplace facilitator laws change the math and how to automate compliance. This is general information, not legal or tax advice. Rules differ by state and change often, so confirm with each state’s revenue department or a sales tax professional.

What sales tax nexus means

Nexus is a legal term for a sufficient connection between a business and a state. Once you have nexus with a state that has a sales tax, you generally must:

1. Register for a sales tax permit with that state
2. Collect the correct state and local tax on taxable sales delivered there
3. File returns and remit the tax on the state’s schedule, even in months with no sales in some states

5 states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Alaska still allows local sales taxes, and many Alaska localities apply them to remote sellers.

Physical nexus: the traditional trigger

You have physical nexus in a state when your business has a real presence there. Common triggers include:

• An office, store, warehouse or other location
• Employees, and in some states contractors or sales reps, working in the state
• Inventory stored in the state, including inventory in a third-party fulfillment center
• Attending trade shows or events where you sell, depending on the state

The inventory rule catches many ecommerce sellers. If you use a fulfillment network that spreads your products across warehouses in several states, you may have physical nexus in each of those states. Our comparison of Amazon FBA vs FBM covers how fulfillment choices affect your operations.

Economic nexus after Wayfair

On June 21, 2018, the US Supreme Court decided South Dakota v. Wayfair, Inc. by a 5-4 vote. It overturned the old rule that a state could require sales tax collection only from sellers with a physical presence. South Dakota’s law required remote sellers to collect if they had more than $100,000 in sales or 200 or more transactions in the state, and the Court allowed it.

Every state with a statewide sales tax now has an economic nexus law. Thresholds vary:

The details matter as much as the dollar figure:

• What counts. Some states count gross sales, including exempt and wholesale sales. Others count only retail or taxable sales.
• Measurement period. Many states look at the previous or current calendar year. Texas uses the preceding 12 calendar months.
• Start date. Once you cross a threshold, states give you a window to register. Texas, for example, requires collection no later than the first day of the fourth month after the month you exceed $500,000.
• Marketplace sales. Many states, including California and Texas, require you to include marketplace sales when testing the threshold, even though the marketplace collects the tax on them.

Key takeaway: Nexus is decided state by state. Track your sales into every state monthly, and include marketplace sales unless a state says otherwise. Crossing a threshold starts a registration clock.

Marketplace facilitator rules

Marketplace facilitator laws make the platform, rather than the individual seller, responsible for collecting and remitting sales tax on sales it facilitates. All states with a statewide sales tax have adopted them. Amazon, Etsy, eBay, Walmart Marketplace and TikTok Shop generally collect tax on your marketplace orders in those states.

That helps, but it does not end your obligations:

• Your own website sales are still yours. If you also sell through a Shopify or WooCommerce store, you collect tax on those orders once you have nexus.
• Marketplace sales may still count toward thresholds. In California, a seller whose sales are all facilitated by registered marketplaces generally does not need to register, but a seller with direct sales over the threshold does.
• Some states still expect registration or zero returns from marketplace-only sellers, especially if you have physical nexus through stored inventory.

If you sell on several channels, see our guides to selling on TikTok Shop, starting on Amazon and Shopify fees.

What is taxable, and at what rate

Nexus tells you where you must collect. Taxability tells you what to collect on. Both vary by state:

• Products. Clothing, groceries and medicine are exempt or taxed at reduced rates in some states.
• Digital goods and software. Ebooks, downloads and SaaS subscriptions are taxable in some states and exempt in others. If you sell digital products, check each state’s rules.
• Shipping charges. Some states tax shipping; others do not if it is separately stated.
• Local rates. Many states add county, city and district taxes. Most states require remote sellers to charge the rate at the buyer’s delivery address.

This is why most growing stores stop calculating tax manually and turn to software.

How to automate sales tax compliance

You have 3 main options:

The Streamlined Sales Tax (SST) program is a cooperative of member states that simplifies registration and administration. A remote seller that only has to collect in an SST member state because it crossed that state’s economic nexus threshold can qualify for free CSP services in that state, paid for by the state. Check the SST website for current member states and providers offering free services.

Pricing for paid automation tools varies by order volume, number of states and whether filing is included. Most vendors publish tiered plans or quote by volume, so compare total cost against the hours you spend on returns.

Whichever tool you use, connect it to your accounting software so collected tax is recorded as a liability, not revenue.

Where to start: a 6-step nexus checkup

1. Export 12 months of sales by state from every channel: your website, each marketplace and any wholesale or in-person sales.
2. Map your physical presence. List every state with employees, contractors, offices or stored inventory, including fulfillment centers.
3. Compare each state against its threshold using that state’s revenue department website or the SST state guidelines.
4. Register before you collect. Collecting tax without a permit is illegal in most states. Register, then turn on collection for that state at checkout.
5. Set a filing calendar. States assign monthly, quarterly or annual filing based on volume. Missed returns bring penalties even when no tax is due.
6. Handle past exposure carefully. If you crossed thresholds in past years, ask a sales tax professional about voluntary disclosure agreements, which many states offer to reduce penalties for sellers who come forward.

If you are still setting up your store, our guides on how to start an online store and setting up a Shopify store cover the basics.

Conclusion

Sales tax nexus is the question of where you must collect, and since Wayfair the answer depends on how much you sell into each state as well as where you are physically present. Track sales by state, include marketplace sales in your threshold math, register before you collect and automate once you are past 2 or 3 states. For more tools and resources by state, browse our top lists.

This is not legal advice.

Sources

• Supreme Court of the United States: South Dakota v. Wayfair, Inc. (2018) — economic nexus decision and South Dakota’s original thresholds
• Streamlined Sales Tax: Remote seller FAQs — free CSP eligibility, threshold practices and member state guidance
• California Department of Tax and Fee Administration: Wayfair use tax collection FAQs — $500,000 threshold and marketplace sales counting
• California Department of Tax and Fee Administration: Marketplace Facilitator Act tax guide — facilitator responsibility for facilitated sales
• Texas Comptroller: Remote sellers — $500,000 safe harbor, measurement period and collection start date