- U.S. ecommerce sales tax rules vary widely by state
- Nexus—your business’s connection to a state—determines whether you must collect sales tax there
- Selling across multiple states and platforms quickly complicates compliance, especially as your business grows
- RJM Tax Exemption simplifies online state sales tax compliance through comprehensive support
As an online seller, dealing with sales tax collection can be complicated and confusing. With rapid changes in the world of ecommerce and a patchwork of state sales tax rules, it can be a struggle to stay compliant. In this guide, we’ll break down online state sales tax obligations and discuss how RJM can help you simplify the entire process, so you feel confident about where you need to collect tax and how to manage it.
Understanding Ecommerce Sales Tax by State
Sales tax in the United States isn’t governed at the federal level. Instead, each state has its own tax laws, sales thresholds, and filing requirements.
Some states don’t have sales tax at all, while others aggressively enforce online state sales tax collection from out-of-state sellers. It’s also important for foreign sellers in the U.S. to be aware that, in most cases, they are not excluded from following state sales tax rules.
What makes all of this particularly complex is that there is no consistency in requirements from state to state. Here are just a few of the different ecommerce sales tax thresholds imposed by states:
- California requires tax collection once you reach $500,000 in annual sales
- New York has a dual threshold—$500,000 in sales and 100 transactions
- Florida imposes a lower threshold of $100,000 in sales without considering transactions
- Illinois sets a dollar threshold of $100,000 in sales or 200 transactions
- Delaware, New Hampshire, Montana, and Oregon currently have NO state sales tax
Given that this is just a partial list of U.S. states, it’s easy to see how widely varied ecommerce state sales tax rules are. It’s up to sellers to track where their customers are located, how much they’re selling in each state, and if they meet the threshold(s) for filing where they sell.
So, do you need to collect sales tax in every state? Not necessarily. It all depends on where you have something called nexus.
What Is Sales Tax Nexus?
Sales tax nexus refers to the connection between your business and a state. It’s what determines if you must collect and remit sales tax there.
Even though catalog sales and other forms of interstate commerce took place for decades before the advent of ecommerce, it was the boom in online sales that triggered a change to state sales tax rules. Before the Supreme Court’s 2018 South Dakota v. Wayfair ruling, nexus was largely determined by physical presence. Sellers typically needed to have some sort of operation in a given state before they were required to collect sales tax. Now, a variety of criteria is used.
Types of Sales Tax Nexus
Several different types of nexus impact ecommerce sales tax collection by state authorities. Here are the primary forms of nexus you should be aware of:
Physical Nexus: This is when you have a physical presence in a state, such as a storefront, warehouse, or office. Even a single employee in a state represents physical nexus.
Economic Nexus: If you have sales in a given state that reach the online state sales tax collection threshold, you have economic nexus.
Affiliate Nexus: When you have affiliates or partners in a state who promote your business, that’s known as affiliate or partnership nexus.
Click-Through Nexus: While it may seem surprising, if you generate sales through referrals from in-state websites, that, too, is a type of nexus.
A Closer Look at Economic Nexus
For online sellers striving to maximize sales, economic nexus is by far the most significant consideration. It can also be the most confusing, due to the aforementioned spiderweb of ecommerce state sales tax rules.
Be mindful that states with dollar-based nexus thresholds reference your gross sales figure. In some cases, discounts, coupons, and rebates require the collection of sales tax on the full price of the sale. And some states don’t tax specific items at all, such as clothing, food, and certain other necessities.
Be sure to keep an eye out for thresholds that are triggered by either gross sales or transaction count. Conversely, New York and Connecticut both use a hybrid model, where sales and the number of transactions must both pass the threshold.
Needless to say, it can be incredibly challenging to track these economic nexus ecommerce sales tax thresholds by state and to collect accordingly.
Further Challenges of By-State Ecommerce Sales Tax
It’s not just the fact that state sales tax rules are different around the country. As an ecommerce entrepreneur, you’re likely selling across multiple marketplace platforms, too. That’s great for maximizing your reach and driving sales, but it can be a nightmare in terms of managing your online state sales tax collection.
That’s because every sale you make in a state counts toward reaching that state’s economic nexus threshold(s), whether you sell on one platform or a dozen or more. The more successful you become, the more complicated your registrations, filings, and collections are. This is especially true for sellers who:
- Operate across multiple platforms
- Sell to customers in several states
- Sell on some platforms that manage collection and others that do not
- Are uncertain about what products are taxable, and where
Getting it wrong can result in penalties, interest, and even suspension of sellers’ licenses and get you kicked off of certain marketplaces.
Common Misconceptions When Deciphering Ecommerce Sales Tax by State
Being unaware of, or misunderstanding, your obligations doesn’t mean they can be overlooked. Here are some things ecommerce sellers get wrong when it comes to understanding state sales tax rules.
1. “I only sell through Amazon, and they collect tax, so I’m fine.”
- Not necessarily. Although Amazon acts as a marketplace facilitator, if you use FBA, your inventory location could trigger nexus.
2. “My gross income is low, so I don’t have to worry.”
- Keep in mind that some states go by transaction count, not gross income. Even if your average dollars-per-transaction is just $5, make 200 of those small sales in a state that uses transaction count as a nexus criterion, and you’re obligated to collect and pay.
3. “Once I register, I’m set forever.”
- Rules change frequently, and some states require periodic registration renewal. Staying compliant demands vigilance.
Regularly reviewing regulations, or working with a team that does so for you—like RJM— is the only way to stay on top of ecommerce state sales tax rules.
How RJM Tax Exemption Helps You Master By-State Ecommerce Sales Tax
Fortunately, you don’t have to go it alone when managing your online state sales tax obligations. RJM specializes in helping businesses handle ecommerce sales tax, state by state.
Nexus Analysis
Knowing where you’re required to collect state sales tax is the first step in playing by the rules. We’ll review your sales volume, inventory locations, and other factors to determine where you have, or might trigger, nexus.
Registration
Once your obligations are identified, we’ll help you register where applicable. It’s best to be proactive to reduce your risk of penalties or other issues.
Automated Tracking
We’ll help you select and configure software that tracks your sales by platform and by state, so your ecommerce sales tax due is calculated correctly. This is particularly important if you sell through multiple marketplaces.
Accurate Record Keeping
No matter how you track your sales, accuracy is key. We’ll ensure you’ve got the correct documentation to support all of your online state sales tax collection in the event you’re audited.
Exemption Management
Items you purchase for resale are tax-exempt in many cases. RJM helps you secure exemption and manage it properly so you don’t run afoul of regulations.
Return Filing
In the same way that decoding ecommerce sales tax collection by state is confusing, submitting your filings can also be complicated. We’ll manage your filings so you are always compliant.
The RJM team offers comprehensive solutions that help U.S.- and foreign-based online sellers get a handle on ecommerce sales tax by state and other complicated tax issues. We know ecommerce state sales tax rules inside and out and navigate them effectively.
Final Thoughts
The short answer to whether you need to collect sales tax in every state is: No. But as we’ve shown, understanding state sales tax rules, whether or not you have nexus, and how ecommerce sales taxes apply to you on a by-state basis isn’t a simple task.At RJM, we want you to focus on selling your products or services and growing your business, not hacking your way through the online state sales tax jungle. Reach out for your FREE consultation today, and learn how we can become your partner in ecommerce success.
