Know your nexus

Getting sales tax compliance right is important. The first step is understanding where your business has nexus, or where you need to collect and remit sales and use tax. Nexus is ever-changing and it can be confusing for even savvy professionals. Fortunately, AI and automation make it easier to identify where you have nexus and to meet your obligations.

Once your business has nexus with a state or local jurisdiction such as a county or city, you must adhere to that taxing authority’s rules including collecting and remitting sales tax and managing use tax obligations. Use tax responsibilities come into play when taxable products or services are purchased without sales tax. The buyer must pay use tax to the jurisdiction where the item is used or stored. Read our 5 steps to managing sales tax guide to better understand your sales and use tax obligations and how to stay compliant.

Unfortunately, you can’t just figure out where you have nexus today and forget about it — you have to closely monitor changes to nexus. Many activities can trigger new tax collection obligations for your business, especially now that every state with a sales tax has passed laws targeting remote sales and use tax revenue and online marketplace sales.

It’s been a while since the 2018 U.S. Supreme Court decision, South Dakota v. Wayfair, Inc., changed tax obligations for remote sellers. Many companies still have a lot to understand about nexus and how it’s established from state to state. According to a 2023 survey by Censuswide, about 55% of respondents can explain all their online sales tax obligations to someone outside their organization. More than 71% of respondents agree or strongly agree that online sales tax requirements including economic nexus and marketplace facilitator laws are complex and confusing.

Sales and use tax nexus affects all businesses that wish to sell into the U.S. It’s imperative that these businesses understand nexus to avoid penalties and fees associated with noncompliance. Furthermore, businesses that sell internationally can trigger the need to collect and remit customs duties and import/export taxes in other countries. Our 5 steps to managing VAT guide is a good starting point for understanding your obligations if you sell into places like Australia, the EU, India, or the U.K.

Your company may also have excise tax nexus or income tax nexus. The factors that trigger these obligations are different. For example, a company can have an obligation to collect and remit sales tax in a state where it has no income tax liability. And while sales tax is typically paid directly by consumers, excise tax is generally paid by businesses on sales and sales-related activities on certain products like alcohol, gas, or tobacco. Like sales tax, compliance rules for excise tax nexus can vary by state.

Failure to register in states where they have nexus is one of the top reasons businesses incur penalties from sales and use tax audits. We know understanding nexus can be tough, which is why we’ve developed this quick reference to help. Throughout this guide we outline what nexus is, what may trigger nexus, and how to keep up with your nexus obligations so you can stay in good standing with tax authorities.

So, what exactly triggers nexus? Unfortunately, there’s no one thing. Nexus has long been linked to physical presence, but even physical presence can be hard to measure. Due to the explosion of ecommerce sales and the Wayfair decision, physical presence is no longer the de facto standard for establishing nexus.

We’ve broken down some common activities that may establish a sales tax obligation for your business.

Economic nexus bases a tax collection obligation on economic activity alone. As a result of the Wayfair decision, economic nexus laws have been adopted by every state with a sales tax, Washington, D.C., and some jurisdictions in Alaska.

Nexus thresholds vary by state and are subject to change. Many states use $100,000 in taxable sales or 200 separate sales transactions as the economic nexus threshold. But some states have higher thresholds, and several states base economic nexus on sales revenue only. Alabama’s threshold is $250,000 in taxable sales during the previous calendar year. In Washington, D.C., it’s $100,000 in taxable sales or 200 sales transactions in the current or previous calendar year. In New York, it’s $500,000 in taxable sales and 100 sales transactions during the previous four sales tax quarters. Some states include exempt sales and services in their thresholds.

Because of economic nexus laws, it’s important for businesses to actively monitor sales volumes in states where they’re not registered. It’s easy to exceed thresholds in one or more states, especially if you sell online or through multiple channels. Avalara Agentic Tax and Compliance™ continuously analyzes your sales across channels and shows where you’re approaching thresholds so you can spot nexus risk early and act before it becomes a problem. Review our state-by-state guide to economic nexus laws for more details on specific thresholds and rules.

The rise of marketplace facilitator laws means that platforms where you sell goods or services, like Amazon, Etsy, and eBay, are now likely to collect and remit sales tax on your behalf. These laws shift the obligation to collect and remit sales tax from the seller to the platform that facilitates the sale. In most cases, the marketplace provider is required to collect and remit taxes if it meets economic nexus thresholds. Depending on the state, remote sellers should either include or exclude marketplace sales in their economic nexus threshold count. You may still need to register in certain states and file returns — even if no tax is due — while also managing any direct-to-consumer sales separately. For example, Connecticut requires remote sellers to register and file returns even when they only sell through a marketplace that collects and remits sales tax on their behalf.

The right tax compliance solution can automatically flag states where your direct sales and marketplace activity may push you over a threshold and help you understand where you must register. Agentic Tax and Compliance™ reconciles marketplace-reported sales with your own records and applies state-by-state rules for including or excluding marketplace sales in your economic nexus thresholds. Find more details in our guide, State-by-state registration requirements for marketplace sellers.

Agentic AI and automation track physical presence nexus risk by continuously monitoring business activity, transaction data, entity footprints, and jurisdictional tax rules to identify where your company may trigger tax obligations. Avalara’s agentic AI platform combines physical presence information with economic nexus activity to provide a single, consolidated view of where you have nexus and why.

Nexus may be triggered even if you and your employees or shippers don’t step foot in another state. Agentic AI and automation apply jurisdiction-specific nexus rules to transaction and sales activity across connected systems to evaluate potential nexus exposure. Combined with continuously updated regulatory content and centralized reporting, Avalara helps finance and tax teams gain greater visibility into “hidden” nexus triggers where expanding sales-channel activity may create additional compliance obligations. For example:

Nexus can be established if an out-of-state retailer is affiliated with an entity that has sales tax nexus in another state. Affiliate nexus laws have been expanded in some states to include activities by unrelated parties that help out-of-state businesses generate or maintain a market in the state.

In New York, an out-of-state seller may have affiliate nexus if it uses in-state representatives to solicit business or otherwise help it develop or maintain a market in the state.

Under click-through nexus laws, your out-of-state business can establish a physical connection to a state through an agreement to reward a person for directly or indirectly referring potential buyers through links on a website.

The referrals must meet the state’s threshold to trigger nexus.

In most states, referrals must generate more than $10,000 in taxable sales during the preceding 12 months or four quarters.

Understanding tax compliance for every country where you sell your products can be challenging, especially if you’re unfamiliar with local laws and languages. Thankfully, there are a few key steps that you can check off to help you remain in good standing with tax authorities.

• Determine the local tax of where you’re selling into.
• Check if you’ve crossed a border during your transaction. If you have, you must clear customs using a Harmonized System (HS) code to help identify any customs duties you may owe.
• Get your item code and HS code to identify what you owe and where it’s owed.
• Remit tax to the appropriate authority and store your documents for future reference.

You must make sure your business abides with each country’s local tax rules and regulations. International businesses need to realize that there are both differences and similarities between selling in the U.S. and selling into other countries. While value-added tax (VAT) in most countries around the world is charged at every stage of production, including manufacturing, distribution, and retail, sales tax in the U.S. is paid by the customer at the final sale of a product.

As you expand globally, your business must register with the appropriate tax authorities. For companies selling in the European Union, Import One-Stop Shop (IOSS) simplifies requirements by allowing businesses to register in just one EU state to sell into all 27.

To sell in the U.S., you must separately register with each state where you have nexus. It can be difficult to do alone because every state has its own application process and form. You can save time by turning to an outside vendor to handle the paperwork and register your business in all the states where you’re obligated to collect and remit sales tax.

There are also customs duties to consider if you’re selling across an international border. Countries have different de minimis thresholds, or values below which goods can be imported without being subject to customs duties or taxes. If your sales exceed the de minimis threshold, you’re liable for remitting the appropriate amount. Assigning the correct HS codes to your products will help you clear customs faster and avoid penalties.

In Europe, each country is a taxing jurisdiction. In comparison, there are more than 12,000 U.S. sales and use tax jurisdictions. They include states, counties, cities, and other municipalities with varying rates and rules. If you establish nexus, your business will need to calculate and collect sales and use tax, file returns, and pay tax to the appropriate jurisdiction. International sellers also have to consider U.S. sales tax exemptions and sales tax holidays. Normally taxable goods are temporarily exempt from sales and use tax during sales tax holidays.

Once registered, your business must submit returns and remit taxes.

Due to the rise of e-invoicing mandates and real-time reporting, many companies are required to issue and/or receive electronic invoices.

Automation can simplify international tax compliance and make it easier to meet your obligations. AI-driven solutions from Avalara identify correct HS codes, apply the right VAT and GST rates and rules, and validate, convert, and transmit billing data in requested e-invoice formats.