It used to be much simpler. If you had a physical presence in a state, you had to collect and remit sales tax there. Now, we’re in the age of eCommerce, and businesses are required to handle sales taxes in every state where they reach an economic threshold.
If you’re new to all this, you’re probably wondering a few things:
- What are the sales thresholds in each state?
- Are there any exceptions or special rules you should know about?
- How do you monitor your nexus obligations?
We’ll cover all these things in this article and break down the rules so you can stay compliant.
Economic Nexus Meaning
Economic nexus decides when an out-of-state business must register to collect sales tax in each state. If you have nexus in a state, that means you are connected to that state for sales tax purposes. You have sales tax obligations in any state where you reach the set economic threshold, whether or not you have a physical presence there.
As your sales figures will change year to year, it’s important to monitor your nexus obligations and register for a sales tax permit as soon as you pass the threshold in a new state.
Physical Vs. Economic Nexus
There are two ways to have nexus in a state: either you have a physical or significant economic presence there.
Physical Nexus:
- You have a store, warehouse, office or postal address there.
- You have employees working there.
- You’ve participated in business events or trade shows in the state.
Economic Nexus:
- Your total revenue in the state surpasses the threshold.
- Your transactions there surpass the threshold.
A Brief History of Economic Nexus Laws
Economic nexus laws, which establish a tax nexus between a seller and a state based on the level of economic activity within that state, emerged in the late 20th century. Before, tax nexus was determined based on physical presence. With the rise of eCommerce, states started challenging this.
A significant landmark case in this area was South Dakota v. Wayfair, Inc. In 2018, the Supreme Court overturned the physical presence requirement and enabled states to impose sales tax on out-of-state sellers with substantial economic activity within the state.
Over time, the thresholds have become lower, and the laws have become more comprehensive to keep up with the way customers in the US are shopping.
Economic Nexus for Sales Tax: Rules and Exceptions
The general principle is that businesses with substantial economic activity within a state are subject to sales tax. However, there may be circumstances that exempt your business from either registering or collecting sales tax in a state.
Some common exceptions include:
- Specific products or services: Some states may exempt certain types of products or services from sales tax, e.g., groceries, medication, or non-profits.
- Marketplace sellers: Most states have specific rules for sales through marketplaces like Amazon and Etsy. You’ll still need to register for a sales tax permit, but typically the marketplace will handle the collection and remittance of sales tax.
- NOMAD states: At the time of writing, the US has five states with no sales tax. You don’t need to register for a tax permit if you have a significant economic presence in these states.
It’s important to note that exceptions and regulations can vary notably from state to state. Businesses operating in multiple jurisdictions should consult with tax professionals to ensure compliance with all economic nexus laws and exemptions.
Economic Nexus Threshold by State
As you can see on the map, the way states determine ‘significant economic activity’ varies. It can be based on:
- Revenue only
- Revenue and transactions
- Revenue or transactions
It’s important to double-check the threshold in each state and keep track of any changes.
How to Monitor Your Nexus Obligations
To monitor where you have economic nexus, you must review your yearly sales figures and check them against each state’s economic threshold. This can be tricky to do manually if you operate across the US, especially if you’re factoring in exemptions.
How to ensure you’re monitoring nexus compliantly:
- Use an automated nexus monitoring system. These solutions integrate with your accounting system or eCommerce platform and send a notification when you’ve reached nexus in a new state.
- Speak to a tax manager about your unique circumstances to ensure you’re not making any errors.
What to do When You Have Nexus
You’ve passed the economic threshold in a state. What should you do now?
- Register for a sales tax permit with the state’s tax authority.
- Set up sales tax collection on your CMS or eCommerce platform.
- File your sales tax returns before the state’s deadline and remit the collected tax.
A Simple Solution to Sales Tax
Finding you have nexus is only the beginning. Managing the collection, reporting and remittance of sales tax is a complex process that you must handle carefully to avoid penalties.
Luckily, as the way we shop has evolved, so has the way we manage taxes!
Yonda Tax is an end-to-end sales tax solution combining cutting-edge software with a dedicated sales tax manager. With our system and economic nexus experts, you can automate:
- Nexus monitoring
- Sales tax calculations and collections
- Filings and reporting
- Remittance
Essentially, we automate your sales tax compliance! If that sounds like something your business could do with, book a free consultation with our team today.
The information in this article is true to the best of our knowledge at the time of writing, but sales tax regulations can change very quickly. You should always consult a tax professional for legal advice.