Sales tax nexus: Thresholds and rules by state

There are many ways you can run a business and sell products to customers all over the country. However, doing so can create sales tax obligations for the state you sell in—meaning you need to charge and collect sales tax in these states. 

Sales tax nexus is when you must pay sales tax in a state. Establishing a sales tax nexus means you have a connection with the state. Various circumstances may trigger sales tax nexus for your business, even if you don’t have a physical store there. 

Here’s what sales tax nexus is, the various requirements, and why it matters for your business:

How sales tax nexus works

You may have sales tax nexus even if you aren’t located in a state. If you sell products online, you may still have nexus. The 2018 US Supreme Court ruling in South Dakota v. Wayfair Inc. allows states to require out-of-state sellers to collect and pay sales tax.

Here’s a general overview of how state tax nexus process unfolds:

1. You start selling or operating in a state. 
2. Your business activities meet the physical or economic nexus threshold.
3. You register as a seller and get a sales tax license for the state. 
4. You begin collecting sales tax.
5. You send the sales tax to the appropriate state authority. 

Note that the deadline for filing your sales tax return and paying sales tax will vary by state.

Types of sales tax nexus

There are generally two different types of sales tax nexus: physical nexus and economic nexus. If you have one or both, you are required to collect sales tax.

Physical nexus

A physical nexus is one where you have a physical connection with the state. This can be things like: 

• Warehouses
• Offices
• Brick-and-mortar stores
• Employees 

However, it is important to note that physical nexus is not only based on business property. It can also pertain to sales activities via traveling personnel or even trade show attendance. 

Economic nexus

You have economic nexus in a state if you meet a threshold, such as revenue or transactions. You can have economic nexus regardless of physical presence because it applies to both in-person and online sales. 

To establish economic nexus, there must be sufficient business activity to warrant taxation. The economic nexus threshold can be either: 

• The total dollar amount you sell
• Total number of transactions 

In some states, you need to meet both thresholds to trigger economic nexus. If you’re using accounting software, it should automatically calculate your sales tax and help you determine whether you have sales tax nexus. 

How to tell if you have sales tax nexus in a state

To figure out whether you have a sales tax nexus, you must consider each state individually and evaluate its nexus rules. 

See if your state charges a sales tax

While states can require businesses to pay sales taxes, not all do. Determining if you have sales tax nexus in a certain state is easy if that’s the case. For example, there are five states without sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.

If you’re in a state that does charge sales tax, you’ll want to research the economic nexus thresholds for the states you ship products to. 

Look up the economic nexus by state

All states have economic sales tax nexus. However, the metrics, such as sales or number of transactions, and thresholds vary by state. The current economic nexus threshold by the state as of 2024 is:

If you’re close to the sales dollars or transaction volume threshold, it’s time to start preparing to register with the state taxing authority. 

Why you need to understand sales tax nexus 

As the business owner, you are responsible for meeting your sales tax obligations. This includes knowing whether sales tax nexus applies to your business in any state you operate in. Here’s why it’s important: 

• You are responsible for collecting sales tax from your customers. If you fail to do so, your business is the one left holding the bill for state taxes.
• You need to register to collect sales tax. If you fail to register for a sales tax license in a state where you have nexus, you may be responsible for paying back taxes plus interest.
• You’re responsible for complying with tax laws. For example, businesses cannot advertise that they don’t collect sales tax merely because they do not have nexus in the state. 

If you are in doubt, it is a smart idea to get individual advice from an expert tax advisor or professional when determining both your sales tax business obligations and the taxability of your everyday business transactions.

How to comply with nexus sales tax laws 

Nexus obligations can be confusing with different state requirements. However, you must understand what sales taxes you’re responsible for and register with the appropriate offices as soon as you have nexus:

Once you’re aware that the state’s nexus threshold has been met—whether that’s in sales volume by dollars or transactions—you will need to:

1. Register with the state’s tax authority: Your accountant can help you determine where you need to register.
2. Research the state’s sales tax rate: Ensure you’re using the right tax rate in your sales tax calculation, and if you have physical nexus, check your local jurisdiction’s rate.
3. Start collecting sales tax: Keep in mind that there are circumstances where sales tax does not apply to certain products or buyers.
4. File your sales taxes by the due date: Each state may have a different due date, so check the filing deadline. Note that your business may be required to file a sales tax return for periods you didn’t collect sales taxes.

Figuring out the sales tax rate based on the state, the type of product, and other factors can be difficult.

Find peace of mind come tax time

If you run a business that sells goods, your sales tax nexus obligations are something that you need to know. However, many business owners may have nexus in a state without knowing it. 

Accounting software, like QuickBooks, can automatically calculate sales tax for you, so you’ll never have to wonder whether you’re collecting the right state taxes. 

Such tools keep track of the ever-changing sales tax laws so you don’t have to. That way, you can focus on what’s important in managing and growing your business.