Does your business sell products online? Whether you’re fully in e-commerce or run an online store as an additional offering to boost sales, digital retail gives you easier access to a larger client base. But if you’re selling across state lines, you’re also taking on a growing list of tax obligations.
You no longer need a physical presence in a state to trigger tax duties. A certain volume or value of sales is enough – regardless of where your business is incorporated. This is the nature of economic nexus laws.
From tracking per state thresholds to submitting tax registrations, e-commerce comes with navigating a web of regulations. In this blog, we unpack practical strategies to help you stay compliant while saving money.
Understanding Economic Nexus
Economic nexus grant states the right to request that out-of-state sellers to collect and remit sales tax when they exceed certain thresholds within that state. Each state sets its own criteria, but most use one or both of the following:
- Sales revenue – for example, $100,000 in gross sales could trigger tax duty, or
- Number of transactions – for example, 200 separate sales can make you liable for sales tax.
If your business meets a state’s economic nexus threshold, you’re typically required to:
- Register for a sales tax permit in that state.
- Collect sales tax on transactions within that state.
- File sales tax returns and pay relevant taxes to the state.
When Does Sales Tax Collection Begin?
In most cases, you only need to collect and remit sales tax on sales that exceed the threshold, so not retroactively. This means that if you hit 200 transactions in a state with that threshold, your obligation usually starts with transaction 201.
You typically won’t need to go back and collect tax on prior transactions, unless the state explicitly requires it.
However, predicting that you’ll cross the threshold isn’t enough to trigger a requirement, and registering too early could create unnecessary filing duties, even if no tax is due. That’s why you need razor-sharp automation to track and monitor sales in real-time. Fortunately, most major e-commerce platforms i.e. Shopify and BigCommerce etc. come with built-in sales tax tools that facilitate this. But if you operate across multiple states, it may be worth integrating dedicated accounting software like NetSuite or QuickBooks to manage the process from threshold triggering to ensuring accurate filings and remittance at scale.
It is, however, important to remember that doing your homework is crucial, as some states may deviate from standard requirements. Consult with your CPA to ensure you’re on track in this regard.
State-Specific Nexus Regulations
Understanding your overall exposure is only half the battle. The real challenge lies in navigating the nuances of individual state rules. While most states have adopted economic nexus laws, the thresholds, filing frequency, and enforcement vary significantly.
Some states base nexus solely on revenue. Others apply a combination of sales volume and number of transactions. Here’s a comparison of economic nexus thresholds and filing expectations across the following high-impact states.
| Threshold Type | Threshold Amount | Filing Complexity | |
|---|---|---|---|
| California | Revenue only | $500,000 in sales | Monthly filings may apply |
| Texas | Revenue only | $500,000 in sales | Quarterly or monthly, depending on volume |
| Florida | Revenue only | $100,000 in sales | Monthly by default |
| New York | Revenue and transactions | $500,000 in sales or 100 transactions | Monthly or quarterly filing required |
| Washington | Revenue only | $100,000 in sales | Exemptions vary; monthly filing common |
| Illinois | Revenue and transactions | $100,000 in sales or 200 transactions | Frequent filings and strict enforcement |
Tax Planning and Compliance Strategies
Once you’ve identified where the economic nexus applies, you need a strategy to manage your multi-state tax obligations. Start with the following steps to avoid noncompliance.
- Assess Your Nexus Exposure
Review your sales and transaction data across all states to determine where you’ve triggered – or may be close to triggering – tax obligations. - Leverage Exemptions and Credits
Some states offer tax breaks and exemptions on certain products. For example, most clothing is exempt from sales tax in New Jersey, and New York provides exemptions for certain qualifying tech investments. Capitalize on relevant breaks as part of your tax strategy. - Automate Tax Compliance
Invest in reliable integrated accounting software to facilitate accuracy. This will help to save you time and minimize errors as you scale. - Consult an Expert
If you sell across state lines, you need expert understanding of the varying rules and a proactive tax strategy. Not only are these laws intricate, they are also constantly evolving.
Whether you’re expanding into new states or juggling existing obligations, sales tax compliance demands precision and accuracy. At Fusion CPA, we can help you assess nexus exposure and build a scalable, audit-ready compliance plan. Contact us today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.