Sales tax nexus presents a unique challenge for online sellers. Traditionally, business owners collect sales tax in the states they have a physical presence. But with the rise of ecommerce, the game has changed. Due to the complexity of sales tax laws that vary state to state, consult your accountant or lawyer for advice on your specific sales tax situation.
Nationally, sales tax makes up about a third of the average state’s tax revenue. As more vendors move online, state legislators are changing the rules for sales tax.
Without a brick-and-mortar business, ecommerce sellers still need to collect sales tax. If you are an online vendor, you need to follow your state’s nexus laws and collect sales tax.
What is sales tax?
Sales tax is enforced by state and local governments on goods and services. As a business owner, you need to collect sales tax, record it in your accounting books, and remit it to the correct government agency.
Sales tax is a pass-through tax. The customer pays the sales tax at the point of sale and the business passes the money on to the government.
In some situations, you do not have to collect sales tax. Depending on the state, some goods and services are exempt from sales tax. For example, in Nevada, grocery products are not subject to sales tax. You also need to pay attention to sales tax holidays. When your state has a sales tax holiday, you do not collect sales tax for some items.
Delaware, Montana, New Hampshire, and Oregon do not impose a sales tax.
Some states use a home rule, even though they do not impose a sales tax. In home rule states, local governments can collect sales tax. Home rule states are Alabama, Alaska, Arizona, Colorado, Idaho, and Louisiana.
To find out if a state is subject to sales tax, check with the state’s Department of Revenue. If the state requires you to collect a sales tax, you will need to know your responsibilities.
What is nexus?
Sales tax collection starts with one important concept: nexus. Nexus is a business presence in a state.
You must collect sales tax in every state you have nexus. Whether you are an online seller or operate a brick-and-mortar business, you need to know how sales tax nexus affects your tax liability.
If you have nexus in a state with sales tax, you must collect sales tax from all buyers in that state. You need to collect sales tax in states where you have nexus, even if that’s not the state where you run your business.
But, you do not have to collect sales tax from states where you do not have nexus. If your business has no presence, you do not collect sales tax from buyers in that state.
Every state handles nexus and sales tax differently. Check with your state’s Department of Revenue to learn more about your nexus rules.
Examples of nexus
Nexus can take several forms, and the rules may be different from state to state. Check the rules for the state you think you have nexus in before charging sales tax.
Here are common examples of sales tax nexus:
Home state nexus is in the state where you live and operate your business. You need to collect sales tax from any buyers located in the same state as your business.
Warehouse, inventory, and storage locations may also be part of your nexus. If they are in a state different from your business’ state, you may need to collect sales tax in that state. For example, if you operate your business from Virginia and have a warehouse in California, you might need to collect sales tax from both Virginia and California.
Employee nexus includes states where your employees, contractors, and salespeople are located. If you have employees in different states than you, you might have to collect sales tax from customers in those states too. Rules for employee nexus vary depending on the state and type of work the employee performs.
Drop-shipping suppliers and fulfillment houses can be considered nexus. Third-party providers ship orders directly to your customers. You might need to collect sales tax from customers located in the same state as your third-party suppliers.
Trade show attendance in the last 12 months creates nexus in a state. You need to collect sales tax in states where your business was at a trade show. Depending on the state, rules for trade show attendance nexus vary.
Collecting and remitting sales tax
Once you find out which state you have nexus in, you need a sales tax permit from that state. If you have nexus in multiple states, you might have to get multiple permits—one for each state. It’s illegal to collect sales tax without a permit, so get it before collecting.
States set sales tax rates. Then, local governments can add a percentage on top of the state rate. Each time you collect sales tax in a different location, you should check the state and local rates.
After you collect the sales tax, remit the funds to the appropriate government agencies. For example, if you collect sales tax in Virginia, remit the sales tax to Virginia’s Department of Revenue.
Sales tax nexus for online sellers
You don’t have a brick-and-mortar business, but you still have to collect sales tax. Even as an online merchant, you have nexus. And nexus determines which customers need to be charged sales tax.
As an online seller, you must collect sales tax from customers in your own state. For example, you run your online business from your home in Ohio. You must collect sales tax from any customers who are located in Ohio.
Online merchants must also collect sales tax in other states where they have nexus. If you have a presence in a state other than your main business location’s state, you must collect sales tax in that state.
For example, you operate your online business from New Mexico. You also have a warehouse full of inventory in Arizona. You must collect sales tax from customers located in New Mexico and Arizona.
To determine which states you need to collect sales tax from, make a list of places your business has a presence. If a customer places an order from a state on the list, you must collect sales tax.
Origin-based vs. destination-based states
Once you know which states your business has nexus in, you need to find out how much sales tax to collect. Depending on your business’ location, you will collect sales tax based on your state’s rate or the customer’s state’s rate.
States are divided into two categories to determine the tax rate: origin-based and destination-based.
Origin-based states
If your business is in an origin-based state, you should collect sales tax based on your state’s tax rate.
Origin-based state = rate based on the seller’s location
Origin-based states:
- Arizona
- California
- Illinois
- Mississippi
- Missouri
- New Mexico
- Ohio
- Pennsylvania
- Tennessee
- Texas
- Utah
- Virginia
Example:
You run your business from Mississippi and sell goods to a customer in Virginia. Because your state is an origin-based state, you collect sales tax at the Mississippi rate.
Destination-based states
Most states are destination-based. As a seller in a destination-based state, you collect sales tax based on your customer’s state’s tax rate. The customer’s state gets the tax money.
Destination-based state = rate based on the buyer’s location
States that are not origin-based states or sales tax exempt use a destination-based rate.
Example:
You run your business from Georgia and sell goods to a customer in Idaho. Because your state is a destination-based state, you collect sales tax at the Idaho rate.
Remote sellers
Some businesses have nexus in multiple states. You are a remote seller in states in which you have nexus but do not operate your business.
For example, you run your business from Utah and you’re using a fulfillment center in North Carolina. You are considered a remote seller in North Carolina and must collect sales tax in that state.
Sales tax rules for remote sellers
Remote sellers have special rules when it comes to origin-based and destination-based states.
There are only a few states that use an origin-based tax rate for remote sellers. If you are a remote seller in Arizona, New Mexico, or California (with some exceptions), you use the origin-based rate.
For example, you live in Texas and have an employee working in New Mexico. You have nexus in New Mexico, but that state is not where your business is based, which makes you a remote seller in New Mexico.
Remember, New Mexico is an origin-based state for remote sellers. When you sell to customers in New Mexico, you collect at your business’ state’s sales tax rate, which is Texas.
Usually, if you are considered a remote seller in a state, that state wants you to use the destination-based rate. You charge the customer’s state sales tax rate.
If you are a remote seller in a state that is not origin-based or sales tax exempt, you will collect sales tax at the destination-based rate.
For example, you run your business from Utah and have additional nexus in Missouri. You are considered a remote seller in Missouri.
Although Missouri is typically an origin-based state, it is not when you are a remote seller. As a remote seller in Missouri, you would collect the destination-based rate, which is Missouri’s rate.
Why are the rules different for remote sellers?
If you collect the origin-based rate in a state where you are a remote seller, that tax money will go to your home state. But since you have nexus in another state, that state wants the tax dollars. As a remote seller, you pay the destination-based rate, so the other state gains the tax money.
Click-through nexus
Click-through nexus is nexus for out-of-state sellers that benefit from people or businesses in other states. You pay people or businesses to help you gain sales, which makes them your affiliates. You have to collect sales tax in the states where your affiliates are located.
For example, if you gain sales from a link on someone’s website, you have click-through nexus in their business’ state. You need to collect sales tax from customers in that business’s state.
Not every state enforces the click-through nexus on eCommerce vendors. Below are the states that do use click-through nexus.
- Arkansas
- California
- Connecticut
- Georgia
- Kansas
- Louisiana
- Maine
- Michigan
- Minnesota
Each state has a different threshold for how much you pay your affiliates. If you are below the threshold, you don’t have to worry about the click-through nexus. Check with your state government to confirm the threshold.
Sales Tax Nexus Takeaway
If you are an online vendor, you need to collect sales tax from states where you have nexus. Sales tax is confusing, but keeping these steps in mind will help you as you run your business:
- Find out in which states you have nexus.
- Get a sales tax permit for each state in which you have nexus.
- Find out if the state uses an origin-based or a destination-based sales tax rate. If it’s an origin-based state, you collect according to your state rates. If it’s a destination-based state, you collect according to your customer’s state rates.
- Collect, record, and remit the sales tax to the appropriate government agencies.
For each location you have nexus, check with the state’s Department of Revenue. The Department of Revenue should be able to answer your questions about collecting sales tax as an online vendor. You may also want to check with a tax professional before collecting sales tax.
