For online sellers, the question is no longer whether sales tax applies beyond your home state. It is where, and when. The answer depends on a concept called nexus, and getting it wrong in either direction costs money: collecting where you need not, or failing to collect where you must. This article is a practical guide for tracking and acting on it. The broader framework is in multi-state sales tax compliance.
What nexus is
Nexus is a connection between a seller and a state that gives the state the right to require the seller to collect its sales tax. There are two broad kinds.
- Physical nexus: you have employees, inventory, offices, or other property in the state. Storing inventory in a third-party warehouse, such as a fulfillment center, can create it.
- Economic nexus: you have no physical presence but your sales into the state pass its threshold, either a dollar amount of sales, a number of transactions, or both.
Thresholds differ by state
Each state sets its own economic nexus rule, and they change. Florida's Department of Revenue, for example, says remote sellers must collect and remit Florida sales and use tax, plus any applicable discretionary sales surtax, once their taxable remote sales exceed $100,000 in the previous calendar year. Other states, including large ones such as California, Texas, and New York, use different dollar amounts, periods, and in some cases transaction counts. We do not list those figures here because they must be confirmed on each state's official site. Treat any national summary, including this one, as a starting point.
How to track where you stand
- 1Export sales by destination state for the past two to three years, by channel.
- 2Separate taxable sales from exempt, resale, and marketplace-facilitated sales, since states count them differently.
- 3Compare each state's totals to its current rule and measurement period.
- 4List where you have physical presence, including inventory in fulfillment centers and remote employees.
- 5Set an alert at about 75% of each threshold so you register before you cross.
- 6Review quarterly and whenever you add a channel, warehouse, or hire.
When registration is required
Generally, you must register once you have nexus, and in many states by a stated date after crossing the threshold, which may be the start of the next period or the next month. Check each state's effective-date rules. Registration comes before collection: collecting tax without a permit can create separate problems.
Registration steps
- 1Register with the state revenue agency, usually online. In Florida, for example, remote sellers register through the online system or by paper Form DR-1, according to the state.
- 2Have your business details ready: entity type, EIN, ownership, NAICS code, and the date you first made sales or established nexus.
- 3Choose your filing frequency, or accept the one assigned by the state.
- 4Configure your cart or tax software to collect the right rate by destination or origin, as that state requires.
- 5Calendar the filing and payment dates, and file even if the return shows no tax.
Marketplace sales
Most states have marketplace facilitator laws under which the marketplace collects tax on sales it facilitates. In Florida, for example, marketplace providers must electronically register to collect and remit tax on sales they facilitate. Do not assume this ends your obligations. Sales through your own website, and sometimes registration or reporting in states where the marketplace collects, can still be yours. See ecommerce accounting services.
Taxability: what is taxable varies too
- Physical goods are generally taxable, but clothing, groceries, and other categories are exempt or taxed differently in some states.
- Digital products and software are taxed in some states and not others.
- Shipping and handling charges are taxable in some states.
- Wholesale and resale sales require valid certificates.
Past exposure
If you crossed a threshold in the past and never registered, you may owe tax for earlier periods. Many states have voluntary disclosure programs that may limit look-back periods and penalties for sellers who come forward first. See sales tax filing services and sales tax audit help.
Our sales tax compliance service analyzes your nexus footprint and handles registration and filing. To talk about your sales tax compliance, send a sales-by-state report and tell us where you store inventory.
