Do you need to collect sales tax for selling online?
If you sell goods online, you may have to collect sales tax on some or all of your online sales. It all depends on whether you have sales tax nexus with the state where your goods are delivered.
What is sales tax nexus?
Sales tax nexus is a connection between a business and a tax jurisdiction that establishes a sales tax obligation for the business.
If you have nexus with a state, you’ll need to register with the state tax department and comply with all applicable sales and use tax laws. In some home-rule states, you may also need to register with local tax departments.
Once you’re registered for sales tax in a state, you need to collect sales tax for selling online to consumers in that state.
How is sales tax nexus established?
All businesses have sales tax nexus with their home state, the state where they’re headquartered. So, if your online retail business is based in Texas, you have sales tax nexus with Texas.
But you may also have nexus with other states where you're selling online and ship tangible personal property.
Nexus can be established through:
- Economic activity in a state (economic nexus)
- Physical presence in a state (physical presence nexus, or physical nexus)
- Referrals originating in a state (click-through nexus)
- Ties to affiliates in a state (affiliate nexus)
There are similarities between state nexus requirements, but no two sales tax nexus laws are exactly the same. That’s one reason why sales tax nexus is tricky for online sellers.
Economic nexus laws provide an exception for small sellers
For example, all economic nexus laws provide an exception for businesses with sales in the state that are beneath a certain sales and/or transaction threshold, but thresholds differ from state to state.
California’s threshold is $500,000 in sales of tangible personal property delivered into the state in the current or previous calendar year. Nebraska’s threshold is 200 transactions or $100,000 in total retail sales made to customers in the state in the current or previous calendar year. Some states include exempt transactions in their threshold, some include services, and so on. It’s complicated.
Physical presence nexus may be more complex than you think
Physical nexus laws can be surprisingly varied too. For example, inventory establishes physical nexus in many states, but some states may provide an exception for inventory stored in a facility owned and operated by a marketplace.
Nexus requirements related to trade show activity can be particularly thorny. In Georgia, you’ll need to register if you participate in a trade show for more than five days a year and trade show activity results in $100,000 in net income. But Massachusetts requires a remote business to register if it solicits orders at a Massachusetts trade show for more than three days in a year.
In a nutshell, what you need to know about nexus is that the devil is in the details.
Marketplace facilitators may take care of sales tax online for marketplace sellers … or not
If you sell through a marketplace, and the marketplace has nexus in the states where you make sales, the marketplace should collect and remit sales tax on your behalf. However, if the marketplace doesn’t have nexus — but you do — you’ll be responsible for the tax due.
Even if a marketplace collects and remits sales tax for you, you may still be required to register and file returns. For example, Connecticut requires remote sellers to register and file returns even when they only sell through a marketplace that collects and remits on their behalf.
And of course, you’re required to register in any state where you have a physical presence, which can be established through marketplace inventory, employees in the state, and more.
So, do you need to collect sales tax on online sales?
Yes. Maybe. No. Unfortunately, there’s no easy answer to this question.
You’re required to register then collect and remit sales and use tax in states where you have nexus
You can establish nexus through economic activity, physical presence, referrals, and ties to affiliates
Your requirements can change because:
States can change their nexus laws
Your circumstances can change
That last point is the icing on the sales tax cake, isn’t it?
Sales tax compliance eats up a lot of time, especially if you manage it by yourself, manually. According to an Avalara/Potentiate survey, businesses with 20–499 employees spend an estimated $1,740 per month on state sales tax obligations and filing requirements. They spend even more time and money ensuring they collect the proper amount of tax, get exemption certificates right, and so on.
But if there’s one good thing about sales tax, it’s that you don’t have to handle it alone. These sales tax nexus resources and this sales tax nexus FAQ can help you learn about nexus and figure out where you may have an obligation to register for sales tax. Once you know where you have nexus, automating sales tax can help reduce the burden of compliance for online retailers.
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