Economic nexus explained: when out-of-state sales create a tax duty

What is economic nexus?

Nexus is the connection a business must have with a state before the state can require it to collect sales tax. Economic nexus is nexus created by sales alone. In South Dakota v. Wayfair, decided in June 2018, the Supreme Court upheld South Dakota's law requiring out-of-state sellers to collect once their sales into the state passed a set level. Every state with a sales tax has since adopted a similar rule.

Economic nexus sits alongside physical nexus, which still arises from an office, staff or inventory in a state. See physical vs economic nexus. A business can have either or both.

What are the thresholds?

Each state sets its own. Most use $100,000 of sales into the state in a year. Some also count the number of transactions, although several states have dropped that test in recent years. A few examples:

States change these rules. Check the state's revenue department before relying on a figure.

Which sales count towards the threshold?

This differs by state, and it is where most miscalculations happen.

• Gross or taxable sales. Many states count all sales into the state, including exempt ones and sales for resale. Texas, for example, counts gross revenue from all taxable and nontaxable sales into Texas.
• Marketplace sales. Many states count sales you make through marketplaces, even though the marketplace collects the tax on them. California and Texas both do.
• Shipping and handling. Some states include separately stated delivery charges.

The Texas Comptroller gives a clear example: a remote seller with $300,000 of website sales and $300,000 of marketplace sales into Texas has $600,000 in total, which is over the $500,000 threshold, so it must collect Texas tax on its website sales while the marketplaces keep collecting on theirs.

Alaska's local system has its own threshold. See Alaska remote seller sales tax. Rates are charged by destination for remote sellers; see origin vs destination.

What do you do once you cross a threshold?

1. Note the date you crossed it

   Each state says when collection must start. Texas, for example, requires a remote seller to start collecting no later than the first day of the fourth month after the month it exceeds the threshold. Other states require registration much sooner.

2. Register for a permit

   Apply to the state's revenue department before you start charging tax.

3. Start collecting on taxable sales

   At the correct state and local rates for each customer's location.

4. File returns on the schedule the state assigns

   Including periods with no taxable sales, where the state requires it.

What if your sales fall below the threshold later?

You do not automatically stop. States have their own rules for ending a registration, often requiring a full year below the threshold. Texas, for example, lets a remote seller end its collection duty after 12 consecutive months in which Texas revenue for the preceding 12 months was under $500,000, using a notice to the Comptroller.

What if you crossed a threshold and did not register?

The uncollected tax can become your cost, because you cannot go back to customers for it. Many states offer voluntary disclosure programs that limit how far back they look and waive some penalties if you come forward before they contact you. Act early.

See voluntary disclosure agreements. Sellers registering in several states can use Streamlined Sales Tax registration.

How should you track it?

Keep a running total of sales into each state, by channel, for the measurement period each state uses. Review it at least quarterly, and monthly once you approach a threshold. For how nexus fits with the rest of sales tax, see how US sales tax works. For marketplace sellers, see sales tax for Amazon FBA sellers.

Where are the state-by-state sales tax guides?

Thresholds, rates, registration and filing for online sellers: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Washington DC, West Virginia, Wisconsin, Wyoming.

This guide is general information. It is not tax or legal advice for your situation.