Tax Nexus for Online Sellers

In 1992, North Dakota tried to make Quill, a mail-order office supply company based in Delaware, collect and pay use tax on sales to its residents, even though Quill had no physical presence in the state.


Naturally, Quill refused and filed a complaint. The Supreme Court ruled in favor of Quill, reaffirming the rule from a previous case (National Bellas Hess) that a state could not require an out-of-state business to collect sales or use tax unless the business had a physical presence in the state.


Fast forward to 2016, South Dakota passed a law requiring out-of-state sellers to collect and remit sales tax if they had sales over $100,000 or 200 separate transactions in the state annually. Wayfair, Inc.,, Inc., and Newegg, Inc. challenged this law, arguing it was unconstitutional based on the old physical presence rule.


This time, the Supreme Court sided with the state. In a 5-4 decision, it ruled that economic and virtual presence could be enough to establish nexus and require tax collection, overturning the old physical presence rule from Quill.


This decision paved the way for the current tax nexus laws.


What is Tax Nexus?


Tax nexus is about determining when your business needs to collect and send sales tax to a state or local government. It allows states to tax businesses that benefit from their economy, even if those businesses aren’t physically present in the state.


This concept helps states collect essential revenue to fund services like education, healthcare, and infrastructure. It also ensures that out-of-state sellers pay their fair share, preventing local businesses from being at a disadvantage. Additionally, understanding tax obligations helps businesses avoid legal issues and penalties.


In short, tax nexus promotes fairness by requiring businesses that benefit from a state’s market to contribute to its upkeep, supporting a balanced and competitive business environment.


Why should online sellers understand tax nexus?


Understanding tax nexus helps you stay on the right side of state and local tax laws, saving you from fines, interest, and audits. Plus, it boosts your business reputation, showing customers that you play by the rules, which builds trust and loyalty.


Knowing your tax obligations also makes financial planning easier. You can anticipate tax expenses and avoid those nasty surprise costs that can throw off your cash flow. This savvy knowledge keeps your business running smoothly and competitively by cutting down on disruptions and audit-related costs.


If you sell on platforms like Amazon, eBay, or Etsy, understanding tax nexus is a must. It ensures you meet marketplace rules and steer clear of penalties or account suspensions. And if you're selling across state lines, it's crucial to know each state's different tax thresholds and regulations.


Collecting the right amount of sales tax makes transactions seamless for your customers and keeps you out of trouble with tax authorities. By mastering tax nexus, you build a solid, trustworthy business that benefits both you and your customers.


How do you know if you have a tax nexus?


Here are the top 10 tax nexus considerations you must be aware of when launching your business or conducting transactions with customers and suppliers in the United States.


Physical Presence Nexus


Traditionally, tax nexus means having a physical presence in a state, like an office, store, warehouse, or employees. If your business operates or has employees in a state, you’re required to collect and remit sales tax for transactions there.


Economic Nexus


Economic nexus laws require businesses with a significant economic presence in a state to collect sales tax, even if they don't have a physical presence there.


For online sellers, this means closely monitoring their sales in each state to determine if they meet the nexus thresholds. If they do, they must register, collect, and remit sales tax accordingly.


What are nexus thresholds?


A nexus threshold is a specific criterion set by states to determine when you must start collecting and remitting sales tax due to having a sufficient connection, or nexus, with that state. This threshold is typically based on sales revenue or transaction volume.


For example, many states set thresholds at $100,000 in annual sales or 200 transactions within the state. These thresholds ensure that businesses generating significant economic activity within a state contribute to state tax revenues.


You must monitor your sales and transaction volumes in each state to determine if you meet these thresholds. If you do, you are required to register for a sales tax permit, collect sales tax from your customers, and remit it to the state.


Examples include California with a $500,000 sales threshold, Texas also with a $500,000 threshold, New York requiring $500,000 in sales and more than 100 transactions, and Florida with a $100,000 threshold.


Marketplace Facilitator Nexus


Marketplace facilitator laws require platforms like Amazon and eBay to collect and remit sales tax on behalf of the sellers using their services. This simplifies tax collection for individual sellers as the marketplace handles it.


However, it's important for you to stay informed about your tax obligations in various states, as you may still need to address other tax-related requirements independently.


Affiliate Nexus


Affiliate nexus occurs when you have affiliates in a state who refer customers through links or advertisements. If these affiliate activities meet certain thresholds set by the state, you may be required to collect sales tax in that state.


This means you need to be aware of your affiliates' locations and the related tax laws to ensure compliance and avoid potential penalties.


Employee Nexus


If you have employees working in a state, even if they are remote, this can create a tax nexus for your business. This means that having remote workers can establish a connection with that state, requiring your business to collect and remit sales tax there.


Essentially, the presence of your employees in a state makes your business responsible for adhering to that state's tax laws.


Inventory Nexus


Storing inventory in a state, even through third-party fulfillment centers like Amazon FBA, can create a tax nexus. This means that if you are using these fulfillment centers, you must consider whether your goods being stored in various states obligates you to collect and remit sales tax in those states. Essentially, where your inventory is located can impact your tax responsibilities.


Dropshipping Nexus


In dropshipping, products are shipped directly from the supplier to the customer, meaning retailers don't physically handle them.


However, retailers may still need to collect and remit sales tax in states where their suppliers have operations. It's essential for retailers to understand these tax obligations to stay compliant with varying state laws.


Click-Through Nexus


When your online business generates sales through referrals from in-state websites (known as affiliate marketing), it creates what's called a "click-through nexus."


This means that if these referred sales exceed a state's set threshold, you must collect and remit sales tax for that state. Essentially, having affiliates in a state who drive significant sales can obligate you to handle sales tax there.


Trade Show Nexus


Trade show nexus occurs when you create a tax obligation in a state by participating in trade shows or temporary events there. Setting up a booth or display, even for a short period, can establish a taxable connection due to your physical presence.


The frequency and duration of your participation, along with making sales or taking orders, can solidify this nexus. You need to be aware of each state's specific rules, as some states have thresholds for the number of days or types of activities that create nexus.


Software Nexus


Software nexus is when a business has a tax obligation in a state due to its software-related activities.


This can occur if you sell or license software (both physical and digital) to customers in that state, provide remote access to software through the internet (like SaaS), or host software on servers located in the state.


Essentially, businesses involved with software must be aware of each state's specific tax regulations, as these activities can require them to collect and remit sales tax.


Understanding software nexus is crucial for ensuring compliance and avoiding penalties, as different states have varying rules about taxing software transactions and services.


How to Manage Tax Nexus


Tax nexus is one of those government obligations that can easily slip under the radar because it can happen in ways you might not expect. That’s why it’s so important to prioritize it when you’re figuring out your tax responsibilities. Here are some simple steps to help you determine and manage your tax nexus effectively.


  1. Track Sales and Transactions: You need to regularly monitor your sales and transactions in each state to determine if they meet any nexus thresholds. Automated tools and software can help manage this tracking.


  1. Register for Sales Tax Permits: Once nexus is established, businesses must register for a sales tax permit in the relevant state. This allows them to legally collect sales tax from customers.


  1. Collect and Remit Sales Tax: Businesses must collect the appropriate sales tax on taxable transactions and remit the collected taxes to the state’s tax authority, usually on a monthly, quarterly, or annual basis.


  1. Stay Updated on State Laws: Tax laws and nexus rules can change frequently. Businesses should stay informed about changes in the states where they have or may have nexus.


Protect Your Online Business—Stay on Top of Your Taxes!


Navigating tax nexus laws can be tricky, but it’s a must to dodge fines, keep your business reputation solid, and ensure smooth sailing. Track your sales and transactions across states, use automated tools to stay on top of thresholds, and keep up with tax law changes.


Mastering tax nexus means protecting your business from legal headaches and setting it up for sustainable growth. Make it part of your strategy, and you’ll handle interstate commerce like a pro while earning your customers' trust.