When do I collect sales tax on out-of-state sales?

Today, even the smallest local boutiques often sell to customers nationwide. If you operate an online business, either in addition to or in lieu of a local storefront, there’s a good chance you sell and ship to out-of-state customers. Do you charge sales tax on items shipped out of state? Should you?

The answer, as is often the case with sales tax, is it depends.

Whether you need to charge sales tax on items shipped out of state hinges on nexus, a connection or link between you, the seller, and a state. If you have nexus with the states where your products are delivered, you typically need to obtain a sales tax permit, charge sales tax, file sales tax returns, and remit sales tax as required by law.

This isn’t something to be taken lightly. If you have nexus and you don’t collect and remit sales tax as required, you can be held liable for the uncollected tax, plus applicable penalties and interest charges. In such instances, the retailer usually ends up paying the sales tax out of pocket; it’s hard to collect sales tax from customers after a sales transaction is complete, and the perils of doing so may offset potential gains. Just imagine how a belated request for sales tax would trend on review and social media sites. 

“We call that the greatest tragedy in sales tax,” explained Mike Fleming, founder and president of Sales Tax and More, in a podcast. “Because something that should be coming out of your customers’ pockets at the time of sale is now coming out of your pocket, years down the road, with the added insult of penalty and interest.” 

With that in mind, here are a few things you should know before selling your products to out-of-state customers.

Nexus determines whether or not a business owes sales tax on products and services sold to out-of-state customers. A business located in Pennsylvania that sells online to customers in Texas would be required to collect and remit Texas sales tax if the business has nexus with Texas — but not if it doesn’t have nexus with Texas. 

If a seller doesn’t have nexus and doesn’t collect sales tax at the point of sale, the buyer would owe the state the corresponding use tax. Here’s what you need to know about use tax vs. sales tax.

There are essentially several ways for a business to establish nexus with a state:

• Economic activity in the state (economic nexus)
• Physical presence in the state (physical presence nexus)
• Referrals from in-state individuals or businesses (click-through nexus)
• Ties to affiliates in the state (affiliate nexus)

Perhaps the most challenging aspect of sales tax nexus is that each state has its own laws. While all states with a general sales tax enforce economic nexus and physical presence nexus, no two economic nexus or physical presence nexus laws are exactly alike. And if affiliate nexus and click-through nexus laws are a bit less common than economic and physical nexus, they’re no less complicated or varied.

If your business has a physical presence in a state, you’re required to obtain a sales tax permit and comply with all applicable sales and use tax laws. You almost certainly know that’s required in your home state, if your home state has a general sales tax. But did you know you can establish a physical presence outside of your home state?

According to the Washington State Department of Revenue, “physical presence is a nexus standard that requires only more than the slightest presence.” In Washington, physical presence nexus-creating activities include, but aren’t limited to:

• Having an employee working in the state
• Having real or tangible personal property in the state
• Having a stock of goods in Washington, including inventory held by a marketplace facilitator or another third-party representative
• Renting or leasing tangible personal property in Washington
• Having an agent or third-party representative engage in activities that are significantly associated with establishing or maintaining a market in the state
• Soliciting sales in Washington through employees or other representatives
• Installing or assembling goods in Washington, either by employees or other representatives
• Constructing, installing, repairing, or maintaining real or tangible personal property in Washington, either by employees or other representatives
• Providing services in Washington, such as accepting returns or providing product training, either by employees or other representatives
• Delivering goods into Washington other than by mail or common carrier, including using the seller’s own vehicles
• Having an exhibit at a trade show to maintain or establish a market in the state (barring certain exceptions)

This list is neither exhaustive nor uncommon, though again, specific requirements vary from state to state. 

Inventory is one of the stickiest wickets, for physical presence nexus. As many Fulfillment by Amazon (FBA) sellers have discovered, marketplace inventory establishes sales tax nexus in numerous states. In fact, more than 20 states have specified that inventory in a state creates sales tax nexus, even when the products are stored in a warehouse owned or operated by a marketplace facilitator or another third party — and even if the seller has little to no control over the movement of their inventory.

Amazon and other large marketplace facilitators are able to offer the same-day and one-day delivery options customers now expect because they have warehouses and fulfillment centers located across the country. Unfortunately, having products in these warehouses can complicate sales tax compliance for FBA sellers and other marketplace sellers. Some states require marketplace sellers to register and remit sales tax returns if they have nexus with the state, even if they only sell through registered marketplaces that collect and remit sales tax on their behalf.

Sales tax nexus laws related to trade shows can be equally complex and stringent, as can laws pertaining to remote employees. Having a remote employee or even independent contract employee in a state can trigger sales tax nexus even if the employee or contractor is only there temporarily, so long as they help establish or maintain a market in the state for the out-of-state business. 

A lot of companies aren’t aware of physical presence nexus, according to Fleming, yet the consequences of overlooking physical nexus can be significant. States can reach far back to recoup unpaid sales tax revenue when a business has a physical presence in a state. He’s seen companies contacted by a state decades after they started using independent contractors in the state. If the state tax authorities discover you have a presence in the state and haven’t been compliant, they can hold you liable for unpaid sales tax back to when you first established nexus.

If physical presence is a “gotcha” for many businesses, economic nexus is giving it a run for its money.

On June 21, 2018, the Supreme Court of the United States overturned the physical presence rule for sales tax with its decision in South Dakota v. Wayfair, Inc. The Wayfair ruling allowed states to tax remote sales, meaning states can now require a business with no physical presence in a state (a remote seller) to collect and remit sales tax. 

Wayfair centered on South Dakota’s economic nexus law, under which a remote seller must register then collect and remit South Dakota sales tax if it has $100,000 in sales or 200 or more separate sales transactions for delivery in the state in the previous or current calendar year. The Supreme Court determined this volume of sales created a substantial connection with the state for sales tax purposes.

There are now economic nexus laws in effect in all states that have a general sales tax, plus Puerto Rico, Washington, D.C., and parts of Alaska (which has local sales taxes but no state sales tax). There are also local economic nexus requirements in a handful of states that allow home rule, but we’ll dive into that quagmire another day.

Every state’s economic nexus law is unique, but all economic nexus laws have a threshold: Businesses that meet a state’s economic nexus threshold must register for sales tax and comply with all applicable laws; businesses whose sales are beneath a state’s nexus threshold aren’t required to register unless they’ve established sales tax nexus with the state in another way.

Unfortunately, for businesses that sell nationwide, sales tax thresholds for economic nexus vary from state to state.

To determine whether you’ve met a state’s economic nexus threshold, you need to find answers to the following questions for every state where you make sales.

It depends on the state. For instance, economic nexus took effect in New York on June 21, 2018, the day the Wayfair ruling was released. Several other states began enforcing economic nexus about 10 days later, on July 1, 2018. Missouri became the last state to enforce economic nexus on January 1, 2023.

In between June 21, 2018, and January 1, 2023, economic nexus took effect in every other state with a general sales tax, plus Alaska, Puerto Rico, and Washington, D.C. There are no economic nexus laws in the states with no sales tax: Delaware, Montana, New Hampshire, and Oregon.

There are basically six different sales tax thresholds for economic nexus:

• $100,000 in sales (e.g., Florida)
• $100,000 in sales or 200 separate transactions (e.g., Illinois)
• $100,000 in sales and 200 separate transactions (Connecticut)
• $250,000 in sales (e.g., Alabama)
• $500,000 in sales (e.g., California)
• $500,000 in sales and 100 transactions (New York)

That’s a lot to keep track of. Making matters worse, every threshold consists of different sales.

It depends. Some states include services in their sales tax thresholds; some don’t. Some states include cloud-based software and downloadable media like music and movies; some don’t. It would be too much to dissect every state’s economic nexus threshold here, but a few examples will give a good idea of what businesses that sell across state lines are up against. 

Florida’s economic nexus threshold is based on taxable sales of tangible personal property delivered physically into the state. Exempt sales and all services shouldn’t be counted when calculating the Florida sales tax threshold for economic nexus, and marketplace sellers should not count sales made through a registered marketplace.

California’s economic nexus threshold is based on the total combined sales of tangible personal property delivered into the state by the retailer and all persons related to the retailer. Nontaxable sales (e.g., sales for resale) count toward the threshold, but services do not. Marketplace sellers should count sales made through a marketplace when calculating the threshold.

The economic nexus threshold in Hawaii is based on the gross income or gross proceeds of taxable and exempt tangible personal property delivered in the state. Intangible property and taxable and exempt services are also included in the threshold, as are marketplace sales for third-party sellers. No transactions are excluded from Hawaii’s economic nexus threshold.

Again, it varies. For example: 

• Colorado and Iowa use the current or previous calendar year 
• Connecticut uses the 12-month period ending on September 30
• New York uses the immediately preceding four sales tax quarters

Economic nexus thresholds can and do change. Arizona built a gradual reduction of the sales threshold into the law. California increased its threshold from $100,000 in sales to $500,000 soon after announcing economic nexus. Numerous states, most recently Indiana and Wyoming, have eliminated the 200-transactions threshold. When a threshold changes, you need to know exactly when the change took effect and when it’s OK for you to deregister if you no longer have nexus under the new threshold.

Check out our state-by-state guide to economic nexus laws for state-specific sales tax threshold details.

Click-through nexus laws had their heyday in the years leading up to the Wayfair decision, when ecommerce was growing like gangbusters and the physical presence rule was still in effect. Under click-through nexus, out-of-state businesses must register for sales tax if they 1) receive referrals from residents of the state, and 2) make a certain amount of sales from such referrals.

Several states have repealed their click-through nexus laws since Wayfair, but they’re still in effect in more than 15 states. For state-specific details, see our state-by-state guide to click-through nexus.

Affiliate nexus laws impose a sales tax obligation on out-of-state businesses that have ties to affiliates in the state. To create nexus, affiliates must somehow promote the remote retailer’s business, by selling a similar line of products under a similar name, for example, or by distributing advertising materials on behalf of the out-of-state business.

Several states have also repealed their affiliate nexus laws, but they’re still on the books in approximately 30 states. As with physical presence nexus and economic nexus, specific requirements for each state vary. 

For state-specific details, check out our state-by-state guide to affiliate nexus laws.

To summarize, businesses that sell to customers across state lines are generally only required to collect and remit sales tax in states where they have nexus. Sales tax nexus can be established through physical presence, economic activity, referrals originating in the state, and ties to in-state affiliates.

If you make more than a few interstate sales, determining if you need to charge sales tax on your out-of-state sales can quickly become a full-time job, and then some. You must understand the nexus laws for every state where you have customers; keep up with changes; gauge whether, when, and where you’ve established nexus; and comply with all sales tax laws as required. It’s tiring just to write, much less live. And nexus can’t be overlooked.

Don’t just take my word for it. “Today, even a small online seller could have a customer in every state,” wrote the Government Accountability Office (GAO) in 2022. “With every sale, a seller has to determine whether nexus, physical or economic, has been met, and potentially collect and remit tax.”

Basically there’s a trade-off. Selling online can dramatically increase your business’s income, but it also complicates sales tax collection, remittance, and filing. And complying with local and state sales tax laws is absolutely essential in states where you have sales tax nexus.

So what now? 

If you’re not sure if and where you may have economic nexus, our free sales tax risk assessment may be a good place to start. If you’re pretty sure you have nexus in one or more states where you’re not registered for sales tax, you may want to consider a nexus study and/or consulting with a trusted tax advisor.

When it comes time to register for sales tax, calculate and collect sales tax, and file sales tax returns in multiple states, Avalara’s suite of tax automation products and services can help. Learn about automating sales tax compliance at avalara.com.

This blog has been updated; it originally published March 15, 2016.