Sales Tax Nexus Basics: When Your Business Must Collect and Remit in Other States

Sales tax used to be simple for small businesses: charge tax to customers in your own state, and ignore the rest. That changed as e-commerce grew and states looked for revenue from sellers without a physical presence. Today, a business selling across state lines may owe sales tax collection duties in states where it has no office, employees, or inventory.

What sales tax is (and is not)

Sales tax is a tax on retail sales of goods and certain services, imposed on the buyer, and collected by the seller, who remits it to the state. In most states, sellers are required to collect tax from customers when they have nexus, and the amounts collected are held in trust for the state. Sales tax is not an income tax and is not part of your profit. Collected amounts are a liability in your books. Not collecting when required can leave the business responsible for tax it did not collect, plus penalties and interest.

What is nexus

Nexus is a sufficient connection between a business and a state to allow the state to require it to collect and remit tax. There are two main types:

Physical presence nexus: having an office, store, warehouse, inventory (including inventory stored in fulfillment centers), employees, independent contractors or sales representatives, or property in the state. Attending trade shows or doing work at customer sites can create nexus in some states, sometimes with temporary thresholds.

Economic nexus: exceeding a state's threshold of sales or transactions into the state, even without any physical presence.

The Wayfair decision

In 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc., holding that a state may require remote sellers to collect sales tax based on economic activity rather than physical presence, as long as the law is reasonable and does not unduly burden interstate commerce. Following the decision, nearly every state with a sales tax adopted an economic nexus law.

Typical economic nexus thresholds

Many states use a threshold of $100,000 in sales into the state or 200 separate transactions in the current or prior calendar year. Others use higher dollar thresholds (such as $250,000 or $500,000), have dropped the transaction count test, or measure over different periods. A few states differ by measuring on rolling periods. Because thresholds change and vary, check each state's department of revenue for the current rule. There is no single national standard.

What is taxable

Rules on what is taxable vary widely:

Tangible goods are usually taxable, with exemptions for groceries, clothing, or medicine in some states.
Digital goods and software are taxable in many states, and not in others.
Services are taxable in some states and not in others. A few states tax a broad range of services. Others tax only specific types. Confirm your own state rules for your industry, since even similar services can be treated differently.
Shipping and handling may be taxable depending on the state and how it is charged.
Exempt buyers: resellers, nonprofits, and government purchasers may provide exemption certificates.

A seller must collect based on the destination, in many states, and rates can vary by county and city. Rate lookup tools and sales tax software help.

Marketplace facilitators

Marketplaces (large online platforms that facilitate sales for third-party sellers) are generally required to collect and remit sales tax on behalf of sellers in most states. If you sell only through such marketplaces, the marketplace may handle collection for those sales. But you may still have obligations for sales made through your own website or other channels, and you may need to register in states where you hold inventory. Also, states differ on whether marketplace sales count toward your economic nexus threshold. Do not assume the marketplace resolves everything.

Steps to manage compliance

Map your sales by state for at least the last two years and the current year. Include transactions from all channels.
Compare to thresholds for each state where you sell.
Identify physical presence including employees, remote workers, inventory, and contractors. See state income tax and remote employees.
Determine taxability of your products or services in states where you have nexus.
Register with each state's department of revenue before collecting. Collecting without a permit can be illegal.
Set up collection: in your invoicing or e-commerce platform, with rates by location.
File returns on the assigned schedule (monthly, quarterly, or annually), even if you collected nothing for a period.
Keep exemption certificates for tax-exempt customers.
Reconcile the sales tax liability account in your books to returns. See month-end close checklist.
Review regularly, at least quarterly for growing sellers.

Voluntary disclosure

If you discover you should have collected in past periods, many states offer voluntary disclosure programs. These programs often limit the lookback period and waive penalties for taxpayers who come forward before being contacted. Consult a professional before contacting a state. The decision involves questions about how much tax was collected from customers, whether you charged tax incorrectly, and the exposure in each state.

Sales tax and entity structure

The entity that makes the sale generally owes the tax. If you operate through multiple entities, each may have its own registrations. State registration is separate from formation. See foreign qualification basics. A sole proprietor or single-member LLC registers using its own taxpayer ID. Sales tax liability can extend to responsible persons for unremitted tax in many states, which is another reason to keep the funds segregated. See liability protection limits of an LLC.

Use tax

If you purchase taxable items without paying sales tax (for example, from an out-of-state seller that did not collect), you may owe use tax to your state at the same rate. Businesses are audited for use tax on equipment and supplies purchases. Track and self-assess as needed.

Common mistakes

Assuming no nexus without a physical office.
Ignoring economic thresholds until a notice arrives.
Collecting sales tax without registering.
Not collecting in states where you hold inventory in fulfillment centers.
Charging tax on nontaxable items, or failing to charge on taxable ones.
Not tracking exemption certificates.
Using the wrong rate (origin versus destination).
Spending collected sales tax rather than holding it.
Relying on marketplace collection without confirming coverage.
Failing to file zero returns.

Registration timing

Many states require registration once the threshold is met, with collection starting at a defined point after crossing (for example, the first day of the month after the threshold is exceeded, or the next transaction). Check the specific rule to avoid missing the start date.

For a review of your multi-state exposure and help with registration and setup, AE Tax Advisors can assist, and a discovery call is a good first step.