With the growth of online sales and the rapidly evolving requirements of businesses to collect state sales taxes, navigating the sales tax landscape becomes increasingly challenging. While we recommend working with an accountant to ensure compliance, this brief overview will cover the basics of economic nexus (also called sales tax nexus) to help you better understand and comply with state sales tax requirements.

What is Economic Nexus?

Economic nexus is a rule about taxes in the United States. When a business sells things in a state other than where it is located, it may now need to collect taxes on those sales. In the past, figuring out if you needed to collect sales tax was pretty straightforward. If your business had a physical spot, like a store or office, or if you had workers or did events in a state, then you needed to collect sales tax for sales in that state.

With more people buying things online, this quickly became outdated. Online shops could sell to people in many states, which meant they often didn’t collect sales tax, which was good for them but not so good for local shops or the states losing tax money. States were missing out on a lot of money each year, up to an estimated $32 billion.

In 2018, the Supreme Court’s decision (South Dakota vs. Wayfair) changed the rules. This ruling allowed states to require businesses to collect sales tax even if the business doesn’t have a physical location like a store or office in the state. Instead, if a business sells a lot in a state, either by selling lots of things or making a certain amount of money from sales, that’s enough to require it to collect sales tax.

Implications for Businesses

Making matters confusing, each state now has its own rules for when a business must start collecting taxes. As a result, businesses need to pay attention to how much they sell and where because if they reach these sales levels in a state, they have to start collecting sales tax for that state. This rule was intended to level the playing field between online businesses and local stores, but puts a lot of extra burden on small businesses.

State Thresholds

In most states, the threshold for economic nexus is $100,000 in sales or 200 transactions over 12 months. There are a few states that are different, such as California and Texas, where the threshold is $500,000.

Here is a breakdown by state:

Next Steps After Reaching the Sales Tax Nexus Threshold

When a business hits the sales tax nexus threshold within a state, the first step should be to officially register for tax collection through the state’s tax authority website. Different states have their own rules about when and how to register. For instance, Texas requires out-of-state businesses to register by the start of the fourth month following the month they hit the threshold. Meanwhile, Rhode Island gives businesses until the beginning of the next year after they meet the threshold to start their tax collection and remittance.

The rules will also vary depending on the type of products you sell, such as physical goods, digital goods, or software-as-a-service (SaaS). Selling digital goods, like e-books, online courses, music downloads, or memberships to websites, brings additional complexity because not every state taxes these types of products, and among those that do, the definition of what counts as a digital product can vary significantly.

Conclusion

In the United States, navigating the maze of over 11,000 tax jurisdictions presents a challenge for businesses, as each state has different rules. For instance, Alabama has more than 900 different tax jurisdictions, while Texas boasts over 1,900. Also, tax rates are not static; they differ based on the type of product sold and the location of the sale, and they are subject to frequent changes.

The task of registering for sales tax and maintaining compliance with reporting requirements is significant and underscores the importance of having an accountant or sales tax service as a business expands and needs to collect sales taxes across different states.