As eCommerce continues to grow, so does the complexity of state and local tax compliance. One of the most important considerations for online sellers is determining which states they are required to collect and remit sales tax. This begins with understanding how to determine sales tax nexus, a critical step in managing risk and ensuring regulatory compliance.
Below, we outline a clear, five-step process to help online businesses identify nexus across multiple jurisdictions.
How to Determine Sales Tax Nexus for My Online Business
Sales tax nexus refers to the minimum level of connection a business has with a state that creates an obligation to collect sales tax. Nexus can be established through a variety of factors, including physical presence, economic presence (i.e., sales), or even affiliate relationships. The rules vary widely by state, making it essential for all businesses, especially online businesses, to periodically evaluate their operations for exposure.
Step 1: Assess Physical Presence
Physical presence remains a foundational element of sales tax nexus. A business may have nexus in a state if it maintains:
- A permanent or temporary office or facility
- Employees or agents operating in the state
- Inventory stored in a warehouse or fulfillment center
- Participation in trade shows or events
- Technicians entering a state to provide maintenance, repair, or installation services
For online retailers, inventory stored in third-party logistics facilities such as Amazon FBA warehouses can create unexpected nexus in multiple states.
Step 2: Evaluate Economic Nexus Thresholds
Since the Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018), all states that have a sales tax have adopted economic nexus standards in addition to their established physical nexus standards. This means a business can establish a nexus based solely on sales volume and / or transaction count, even without a physical presence.
In making their ruling, the Supreme Court explicitly excluded “small businesses” by establishing minimum revenue and sales thresholds of at least $100,000 in revenue or 200 transactions.
To ensure compliance, businesses should conduct regular reviews of their sales data by state and compare against current thresholds, which can change frequently.
Step 3: Understand Marketplace Facilitator Laws
If you sell through third-party marketplaces such as Amazon or Etsy, it is important to understand marketplace facilitator laws. In many states, the marketplace itself is responsible for collecting and remitting sales tax on behalf of sellers.
However, businesses may still be required to register, file informational returns, or report exempt sales—even if the marketplace handles the tax collection for the majority of / all their sales.
Step 4: Consider Affiliate and Click-Through Nexus
Some states impose nexus when businesses engage affiliates or referral partners within the state. These rules, often referred to as affiliate nexus or click-through nexus, typically apply if:
- You have a formal agreement with an in-state party that drives sales to your website
- Sales generated from those referrals exceed a state-defined threshold
This can affect businesses that use influencers, bloggers, or affiliate networks.
Step 5: Monitor Temporary Activities That May Trigger Nexus
Short-term activities, such as sending staff for training, hiring remote contractors, or attending conferences may create nexus in certain states. These events can still trigger tax obligations, especially if they recur or involve revenue-generating activities.
Keeping a record of all out-of-state business activity is essential for evaluating potential exposure.
Staying Ahead of Sales Tax Nexus Obligations
Determining where your business has sales tax nexus is not a one-time exercise. As laws evolve and your business grows, so does your nexus footprint. Proactive monitoring and professional guidance are key to avoiding penalties and ensuring accurate compliance.
If your business needs support assessing nexus and managing multi-state sales tax obligations, a firm like Source Advisors can help you navigate these complexities with confidence.
Want clarity on your sales tax obligations? Speak with a tax specialist to assess your nexus footprint and develop a compliant strategy for your online business.
