How to Determine Your Sales Tax Nexus Exposure

Sales tax nexus is a critical concept for businesses, especially as states increasingly tighten tax regulations to capture revenue from online sales. If you're a business owner selling goods or services across state lines, you may be required to collect and remit sales tax in multiple states, even if your business doesn’t have a physical presence there. Understanding your sales tax nexus exposure is key to remaining compliant and avoiding penalties. This guide will walk you through what sales tax nexus is, the types of nexus, and how to determine if your business is exposed.

What is sales tax nexus?

Sales tax nexus refers to the connection between a business and a state that obligates the business to collect sales tax on sales made to customers in that state. Traditionally, nexus was based on having a physical presence—such as an office, warehouse, or employees—in a state. However, as the digital economy has evolved, so has the definition of nexus. Now, sales tax nexus can also arise from factors like sales volume and transaction thresholds, even without physical presence, thanks to the 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc.

Types of sales tax nexus

Understanding the different types of sales tax nexus is the first step to determining your exposure.

Physical nexus

This is the traditional form of nexus. A business has physical nexus in a state if it has:

• A physical office, store, or warehouse
• Employees, contractors, or sales representatives in the state
• Inventory stored in the state (including through third-party fulfillment centers like Amazon FBA)

If any of these apply to your business, you’re likely required to collect sales tax in that state.

Economic nexus

The Wayfair ruling introduced economic nexus, which allows states to require businesses to collect sales tax based on economic activity within the state, even if the business has no physical presence there. Each state sets its own economic nexus thresholds, typically based on:

• Sales volume (e.g., $100,000 in annual sales)
• Number of transactions (e.g., 200 separate transactions in a year)

If your business exceeds these thresholds in a particular state, you may be obligated to collect and remit sales tax, even without a physical presence.

Click-through nexus

Some states have "click-through" nexus laws, which create nexus for out-of-state sellers if they partner with in-state websites or affiliates that refer customers. Essentially, if you generate sales through affiliates in a state, you may be required to collect sales tax there.

Marketplace nexus

If you sell through online marketplaces like Amazon, Etsy, or eBay, some states have marketplace facilitator laws. These laws require the marketplace (rather than individual sellers) to collect and remit sales tax on sales made through their platform. However, sellers should be aware of their obligations, as not all states have these laws, and some may still require sellers to register and report sales tax.

Steps to determine your sales tax nexus exposure

Now that you understand the different types of nexus, follow these steps to determine your sales tax nexus exposure.

1. Review your business activities

Start by assessing where your business has a physical presence. Do you have offices, employees, or inventory in other states? Do you send contractors or sales reps to other states to conduct business? If so, you likely have physical nexus in those states.

2. Analyze your sales data

For states where you don’t have a physical presence, check your sales and transaction volume. Review your gross revenue and the number of transactions in each state over the past year. Compare this data against the economic nexus thresholds for each state. Most states publish their thresholds, so a quick search can help you find the requirements for any given state.

3. Evaluate your affiliate and marketplace relationships

If you have affiliates or partners in other states, you may be subject to click-through nexus. Similarly, if you sell through a marketplace, check to see if the marketplace is responsible for collecting sales tax on your behalf in the states where you have sales. It’s important to review each state's laws, as they vary.

4. Monitor changes in state laws

Sales tax laws are constantly evolving, especially with states frequently updating their economic nexus rules and thresholds. Make sure to stay informed about legislative changes in the states where you conduct business. Subscribing to sales tax news or using a sales tax compliance tool can help you keep track of changing regulations.

5. Register in relevant states

Once you’ve identified the states where you have nexus, you’ll need to register for a sales tax permit in each state. Failure to register and collect sales tax can result in penalties, interest, and back taxes. The registration process can vary by state, but most states allow online registration through their Department of Revenue websites.

Tools and resources to help you manage nexus exposure

Staying on top of sales tax nexus can be daunting, especially for growing businesses. Fortunately, several tools and resources can help:

• Sales tax automation software: Tools like LumaTax can automate sales tax calculation, collection, and remittance across multiple states, saving you time and ensuring accuracy.
• Sales tax nexus calculators: Some platforms offer free calculators to help you determine if you’ve exceeded economic nexus thresholds in specific states.
• Professional guidance: If your business is expanding rapidly, or if you’re unsure about your nexus exposure, consulting a tax professional can provide clarity and ensure compliance.

Conclusion

Determining your sales tax nexus exposure is an essential task for any business that sells across state lines, especially in the post-Wayfair world. By understanding the different types of nexus, reviewing your business activities and sales data, and staying informed about state-specific laws, you can protect your business from costly compliance mistakes. Whether you handle sales tax yourself or rely on automation tools, being proactive about nexus will save you time, money, and headaches down the line.

Do you need help with your sales tax compliance? Book a free call with one of our sales tax experts to find bespoke solutions for your business, optimize your tax costs, and reach millions of new potential customers.

Frequently Asked Questions

What is sales tax nexus?

Sales tax nexus is a business’s connection to a state that requires it to collect sales tax on in-state sales, often due to physical or economic presence.

Can my business have nexus without a physical location in a state?

Yes, economic nexus laws allow states to require sales tax collection based on sales volume or transaction count, even without physical presence.

What are the main types of sales tax nexus?

Physical, economic, click-through (affiliates), and marketplace nexus are the primary types, each with unique requirements.

How can I determine if I meet a state’s economic nexus thresholds?

Compare your sales data with each state’s economic thresholds, typically found on their Department of Revenue websites.

Do I need to collect sales tax if I sell on an online marketplace?

In many states, yes, but some have marketplace facilitator laws where the platform collects tax for sellers.

What are the risks of not complying with nexus laws?

Non-compliance can lead to penalties, interest, and back taxes, so registering and collecting in relevant states is crucial.