Nexus for Sales Tax: When to Collect in Other States

Understanding what creates sales tax nexus is critical for any business that sells goods or services outside of its home state. Nexus decides whether a state has the right to ask you to collect and hand over sales tax for sales made to customers of that state. Traditionally, a physical presence — say, a store, warehouse or employee — as established nexus. Now, economic nexus and other laws leave many sellers with collection obligations but little or no physical presence in a state.

What creates nexus now?

States utilize various rules to create nexus. The most common triggers are:

Physical presence:

A place, stock, employees or agents in a state. And this is still a pretty direct road to nexus.

Economic nexus:

Meeting a state's level of sales volume or transactions, even without physical presence. Economic nexus is typically based on either gross annual sales or the number of transactions.

Marketplace nexus: Some states require the marketplace or third-party platform you sell through to collect tax if you use one to sell. In other instances, the sellers are still on the hook.

Click-through and affiliate nexus:

In-state affiliates or referral arrangements may create nexus if they generate sales based on contracts signed with the company.

The definition of these triggers varies in each State. So the very same business activity could produce nexus in one state and not another. The 2 most important responsibilities post nexus are registration and collection. Once nexus is present, you usually have to register with the state’s tax agency, begin collecting the appropriate sales tax, file returns and remit payment in a timely manner.

Economic nexus: thresholds and timing

Economic nexus usually involves the satisfaction of certain thresholds over a look-back period, which is typically a 12-month period. There are varying thresholds, like $100,000 in sales or 200 transactions, but the thresholds vary by state. Some have a dollar only threshold; others permit a transaction-count trigger. A seller that exceeds the threshold of a state during the measurement period will owe tax on future sales and, in some states, may be required to pay back taxes on past sales after registration dates.

Important timing considerations:

Upon reaching a threshold, registration and collection responsibilities could apply instantly or at the outset of the next reporting cycle. Consult the state’s terms for specific timing.

“Most states ask vendors to track in dollars and transactions at once.” And a seller can cross them just temporarily, because of fluctuations during the selling season.

Some states permit voluntary registration prior to reaching thresholds, which could streamline compliance and exempt businesses from retroactive tax liability.

Practical steps to determine nexus

Map your activities. List where you have physical offices, inventory, employees, agents or affiliates. Include 3rd party fulfillment centers and pop-up events.

Track sales by state. Keep precise and current records of sales and transaction volumes by each state. While automated reporting tools are great, for a smaller seller a diligent manual reconciliation can do the job.

Review state thresholds. The economic nexus thresholds, dates that rules apply and whether there are marketplace or click-through rules all depended on each state's statutes and guidance.

Register proactively. Once you get close to, or over a threshold, go ahead and register with the state tax authority so that you don’t have penalties and interest. Typical sign-up might include some basic business information and a run-of-the-mill application, sometimes financials.

Implement collection processes. Set up invoices and checkout systems to charge the amount of sales tax appropriate for the customer's area of jurisdiction, including state, county and local taxes.

File and remit timely. Know how often you need to file, by when; some states mandate monthly returns for sellers with larger liabilities, while others allow for quarterly or annual filings.

Nuances that often surprise sellers

• Product “Taxability” Variation: Not every product or service is taxed the same way. Tangible personal property is normally subject to taxation, though many states offer exceptions for certain services or groceries or medical goods. Establish the taxability of your sales in each state.
• Destination-based vs. origin-based sourcing: Most states are destination-sourcing, where a tax rate is based on the location of the buyer. A minority employ origin sourcing – taxing according to where the seller is based. This will decide which tax rates it pays.
• Use tax responsibilities: Though you may not charge your customers sales tax, they might owe use tax. Businesses might also owe use tax when they bring goods into a state, not for sale, but for use.
• Retroactive exposure: Certain states will apply the rules retroactively to the effective date their nexus law or economic nexus adoption. That can result in surprise liability for past years if records are incomplete.

Managing multistate compliance efficiently

Multi-state sales tax compliance quickly becomes complicated as you grow. Consider these practical approaches:

• Centralize reporting: Recordkeeping in one system is best practice for orders, returns and tax collected. That eases reconciliation and audits.
• Follow uniform product classifications: Categorize product and service purchases at clear taxability codes, enabling you to apply the right rates across states.
• Be aware of laws that change: States regularly revise the thresholds at which tax kicks in, the sourcing rules and what is taxable. Put on the calendar each quarter a review of states where you sell.
• Budget for compliance costs: Submitting to many states raises the administrative and filing burden. Account for this in pricing and cash flow projections.

When to seek professional help

If your business is selling in many states, has complex products or uses affiliates and third-party fulfillment, professional advice can save time and help reduce risk. A tax consultant or multistate compliance expert can assist with clarifying any unclear rules and drafting voluntary disclosures if necessary, in addition to suggesting cross-border nexus redress solutions.

Key takeaways

Sales tax nexus dictates where you are required to collect and remit taxes. There can be obligations based on both physical presence and economic nexus. Monitor your sales and transactions by state, know where to collect tax an how much product is taxed or untaxed, register when necessary, be consistent with collecting and filing. With the right planning and recordkeeping, you can handle multistate sales tax obligations with fewer surprises and penalties.