eCommerce has already transformed the livelihoods of so many online sellers. If you or your business is beginning to find traction online, you’ll need to start thinking about the following three words: sales tax nexus.
For better or worse, there are a number of online sales tax obligations you’ll have to navigate depending on the states you engage with and the volume of your sales. This page serves as our essential guide to eCommerce sales tax.
We’ll cover what a ‘nexus’ is, how to determine whether you have one, and what you’ll need to think about along the way.
What is Meant by ‘Sales Tax Nexus’?
Like most things tax related, this term seems complicated at first glance but is actually fairly straightforward. In this same vein, however, the devil is in the details. In short, a ‘nexus’ is a term used to describe a seller or business that is engaged with (and therefore obligated to file taxes in) a given state.
To use an old-school example, let’s say your company’s Florida-based warehouse caught fire and the fire service had to come and extinguish the blaze. In this instance, you’d be benefitting from the state’s services – your warehouse would mean you had a sales tax nexus with Florida.
The physical presence argument (your warehouse in this example) used to be the only basis used to determine whether a seller would have tax obligations in a state. Since the 2018 Wayfair case, however, things have changed.
How States Determine You Have Nexus
So, how has sales tax for online sales changed since 2018 and when do sellers need to collect? In general, there are now two factors to think about here:
- Physical presence
- Sales tax economic nexus
Physical Presence
As the name suggests, this basis for sales tax is related to your physical locations in a state – think brick & mortar stores, warehouses, fulfillment centers, and the like. If you only sell things online, you’re not off the hook just yet.
Sales Tax Economic Nexus
If you make enough sales or generate enough revenue in a given state, you may be liable for sales tax regardless of any physical locations. This is what’s known as an economic nexus. The specific threshold you’ll have to navigate will depend on the state you’re making sales in.
In many cases, this is set at 200 transactions OR $100,000 of revenue. All of your sales before you reach a state’s threshold are not liable. It’s only once you’ve hit this limit that liability starts.
How to Determine Sales Tax Nexus
To determine whether you have a sales tax nexus with a specific state, you’ll need to answer the following questions:
- Do I have any physical locations/ operations within the state?
- Do I make enough sales to surpass the state’s sales tax threshold?
If you answered yes to either of these questions, you’ll probably have to register and file a return. Your ecommerce platform of choice will usually provide information about your number of transactions, how much money they’re generating, and where they’re taking place.
Your appetite for risk comes into play here – if you’re only liable for $10 in Texas, is it really worth going through the process of filing? That’s up to you.
What Changes Platform to Platform?
The state(s) you’re engaging with aren’t the only factor to think about – your ecommerce platform of choice is also important. Sites like Amazon or eBay are what’s known as “marketplace facilitators” – they make sales, transactions, and often fulfillment possible. Many states have marketplace facilitator laws that ‘force’ these companies to collect sales tax on behalf of their sellers.
We explore the basics of this below:
Amazon
If you sell exclusively on Amazon, you usually won’t have to worry about collecting sales tax yourself. The company now does this on behalf of their sellers in every state with a fulfillment center. The only exception to this is Missouri, and only until January 1, 2023.
If you’re in Missouri, you only have to turn on Amazon’s sales tax setting if you have physical presence there. At least until January 1, 2023 when their economic nexus laws go into effect. You may also need to determine whether things like handling and shipping are taxable in your situation.
For more guidance on what you need to do about sales tax as an Amazon seller, watch Amazon Sellers Sales Tax FAQs.
Shopify
If you’re wondering how to determine sales tax nexus for Shopify stores, the process is much like that described above. You’ll need to know how many transactions you’re making and/ or how much revenue these transactions generate – the specifics, again, come down to each state.
If you’re using Shopify’s fulfillment network, you may be liable for sales tax in the following states (Shopify has physical fulfillment warehouses in these locations):
- Georgia
- Missouri
- Nevada
- Pennsylvania
If you know you’re liable for sales tax in a given state, follow these steps:
- Login to your account
- Click settings > tax
- Click tax regions > United States > manage > collect sales tax
- Go back to taxes – tax calculations and click charge tax on shipping rates
- This can be overridden for states where shipping isn’t taxable (settings > taxes > tax regions > shipping override
We have more detailed instructions, along with screenshots, in this blog – Shopify Sales Tax Setup | Where and How to Collect.
Other Marketplace Platforms
The process for collecting sales tax on other marketplace platforms is still determined by whether or not you have a physical or economic nexus with a given state.
Non-Marketplace Sales
If you’re not selling on a common ecommerce platform, your situation may be a little trickier to navigate. You’ll need to keep good records for the following:
- How many sales you’re making
- How much money these sales have made
- Where these sales are generated
- Any physical locations you have in the United States
Once you’ve reached a state’s threshold, it’s your responsibility to start collecting sales tax on future sales and file returns where applicable. We have a guide to state sales tax thresholds at the end of our 10 Steps to Ensure Sales Tax Doesn’t Burn Down Your eCommerce Business. It’s a great place to start.
Final Thoughts – Learn More With LedgerGurus
Still scratching your head? We’re happy to help. Shoot us a message and we’ll get back to you with advice. If your business generates more than $1,000,000 per year, we’d strongly recommend getting a sales tax expert onboard – we can also help with this.
In the meantime, you might like to check out our Sales Tax Maturity Assessment to see where you need to be with your sales tax. We also give helpful suggestions for each stage of where people are at.
We also recommend you watch our sales tax masterclass, The Uncomplicated Truth about Sales Tax. It’ll answer many of the questions you probably have about sales tax, as well as tell you the three things you MUST NOT DO when you’re setting up your sales tax.
