Until 2018, a business had to have a physical presence in a state to be required to collect its sales tax. The Supreme Court's Wayfair decision changed that, and every state with a sales tax now has an economic threshold that pulls in remote sellers. Founders selling nationally online cross those lines without noticing, and the state finds out later, from marketplace data or a customer's audit.
Two kinds of nexus
Physical. An office, an employee, a contractor doing regular work, a warehouse, or inventory in the state, including inventory in a fulfilment centre you never see. Attending a trade show can do it in some states. Physical nexus has no threshold: one item in a warehouse is enough.
Economic. Sales into the state above a threshold, measured over the current or previous calendar year. Most states use $100,000 of sales; a number of them have dropped the older "200 transactions" test; California, Texas and New York use $500,000. The measurement base varies (gross sales, taxable sales, or retail sales) and whether marketplace sales count toward it varies too.
Marketplace facilitators
Every state with sales tax now requires marketplaces (Amazon, Etsy, eBay, Walmart, app stores) to collect and remit on sales they facilitate. If all your sales are through marketplaces, your remittance burden is small. Registration may still be required where you have physical nexus, and marketplace sales may count toward the economic threshold that then obliges you to collect on your own-site sales.
What is taxable
Physical goods, almost everywhere. Digital goods, in roughly half the states. Software as a service, in around twenty states, with different rules for business versus personal use and for downloaded versus hosted software. Services, in a minority of states and for specific categories. A SaaS company selling into Texas, New York, Pennsylvania and Washington has collection obligations there once over threshold; the same company selling into California does not for SaaS. This is the single most misunderstood point among software founders.
Registering and filing
- Track sales by ship-to state monthly. Shopify, Stripe and most platforms export this.
- When a state's threshold is crossed, register for a permit there before collecting; collecting without a permit is an offence in most states.
- Configure the store or billing system to charge the right rate, which in destination-based states is the buyer's local rate, down to the district.
- File on the frequency the state assigns (monthly, quarterly or annually, based on volume), including zero returns. Missed returns produce estimated assessments.
- Reassess annually as sales shift between states.
Past exposure
If you crossed a threshold two years ago and never registered, the tax you should have collected is now your cost, with penalties and interest. Most states run voluntary disclosure programmes that limit the look-back (often three or four years) and waive penalties for sellers who come forward before being contacted. The calculation is worth doing before registering, because registration itself can prompt the state to ask about prior periods.
Tools and help
Under three or four states, the platform's tax calculation and manual filing are manageable. Beyond that, TaxJar or Avalara for calculation and filing, or a firm that files for you from the platform data. Nexus studies, registrations and voluntary disclosures are part of our bookkeeping plans for e-commerce and SaaS clients, and the Growth plan includes sales tax filing in the states where you are registered.
The check: export last year's sales by state. Any state over $100,000 (or $500,000 for California, Texas and New York) where you are not registered is the place to start.