What online sellers need to know about economic nexus
Ecommerce has no borders.
By selling online, you essentially open up your business to customers all over the world. But while this translates to lots of potential growth for your business, it also adds complexity to your sales tax responsibilities.
Put simply, you may be required to pay U.S. state sales tax even if your business isn't located in a given state. Here’s what you need to know about economic nexus and how it impacts your business.
Read also: Online sales tax guide for eCommerce
What is economic nexus?
Economic nexus refers to a business’s obligation to collect and remit sales tax in a given state after making a certain amount of sales or transactions in that location.
Economic nexus was established in 2018, when the Supreme Court rendered its decision in South Dakota v. Wayfair, Inc. The decision overruled previous tax laws, which only required sellers to pay tax if they had physical presence (think: a store, warehouse, employee, trade show booth, etc.) within a state. Since this 2018 precedent, many states not only monitor for physical presence nexus—but have also set economic nexus thresholds for out-of-state sellers, putting online and out-of-state businesses on the hook for collecting sales tax.
That said, nexus guidelines and thresholds vary by location, so it's important to check the laws of each state that you sell in.
For example, in South Dakota, economic nexus only applies to sellers who "deliver more than $100,000 of goods or services into the state or engage in 200 or more transactions for the delivery of goods or services into the state" (as outlined in the Supreme Court opinion).
Economic nexus even impacts sellers who live outside of the U.S. Foreign eCommerce businesses may be responsible for state taxes on top of any U.S. customs tariffs and duties paid to the U.S. government.
Which types of transactions are taxable and which are exempt?
In most states, economic nexus is based on the last 12 months of transactions and involves the gross sales of goods, property, or products delivered in a state. The types of transactions considered taxable vary from state to state. Similarly, exemptions vary by state. However, exemptions can generally be understood across three different categories of transactions. (Though note: exempt transactions may still count towards your economic nexus threshold in some states, plus carry unique registration and filing requirements.) These categories include product, purchaser, and use types. Examples of common product types that may be exempt from nexus thresholds include:
Food and medicine
Medical and/or prosthetic devices
Examples of purchaser types that may be exempt are:
The federal government and its agencies
State, city, and county governments and agencies
Charitable, nonprofit, educational, and religious organizations
Exempt use types typically support industries or activities that serve the greater good. Examples include:
Industrial production and research activities
Agricultural, horticultural or forestry for food production
Environmental conservation or pollution control
Tips for remaining compliant
There are some easy steps you can take to get your economic ducks in a row for tax season. Start by familiarizing yourself with economic nexus laws and exemption types, then follow the following steps.
01. Identify where you have sales tax nexus
Your first step in complying with economic nexus laws is to identify the states where your business meets the nexus threshold.
While sales thresholds are at least $100,000 for most states, some states go as low as $10,000 unless you comply with the state’s notice and reporting requirements. Also, if you sell a high-volume of inexpensive items like phone cases or t-shirts, you could hit transaction thresholds (e.g., 200 or more transactions) before you hit the sales threshold.
To this end, keeping clean records is a must. Software like Avalara can simplify this work by providing tools to help you track and understand where you’re hitting (or will potentially hit) nexus thresholds.
Avalara’s automated sales tax calculation service comes free with select Wix business subscriptions. Connect Avalara to your Wix storefront to automatically calculate tax rates for every order you receive.
02. Monitor business changes year-round
The best way to ensure compliance with state nexus laws is to monitor changes in sales volume, particularly after you do something that might impact sales. These situations may include:
Expanding to new sales channels like online marketplaces or a mobile app
Adding new products or product lines to your store
Making changes to marketing or receiving PR/media coverage that could drive more customers (and sales)
It goes without saying that you’ll want to keep a close eye on changes to tax laws and policies, particularly in states where your sales volume is high. Laws are constantly changing, and it's your responsibility as the seller to stay informed.
03. Create an economic nexus plan
The best way to ensure economic nexus compliance is to create a plan that helps you monitor and maintain compliance at the state level.
Your plan should include the following:
A list of states where economic nexus is anticipated based on your sales
The estimated economic sales thresholds per state
What states (if any) where you plan to obtain sales tax permits
A schedule for filing and remitting taxes
An economic nexus policy statement that explains your business's compliance efforts
As mentioned earlier, it's helpful to have a sales tax tool that tracks economic nexus activity and allows you to determine where economic nexus has been met. This can help you avoid potential audits or penalties from state governments. Tools like Avalara provide automated sales tax calculations, comply with global tax rules, and streamline your checkout process.
04. Register for a sales tax permit in relevant states
A sales tax permit—also called a "sales tax license" or "seller's permit"—allows you to collect and remit sales tax in each state. Thus, if you hit a state's nexus threshold, you'll need a sales permit to collect sales tax.
A sales tax permit is different from a resale certificate. Where the former allows you to collect and remit sales tax, the latter is used to make tax-free purchases of taxable goods that are intended for resale.
As with all-things tax-related in the U.S., the process of getting a tax permit differs from state to state. Some states make it much easier than others. Sales tax permits are free in most states, but some states like Arizona, Arkansas, and Connecticut charge nominal fees ranging from $12 to $100.
05. Understand marketplace facilitator laws
If you sell on marketplaces like Amazon, Etsy, or Walmart, you might be off the hook (depending on the state) when it comes to economic nexus compliance. Marketplace facilitator laws place the burden of tax compliance on marketplaces. Under these laws, marketplaces are obligated to collect and remit sales tax on behalf of you, the seller.
To date, over 30 states have adopted marketplace facilitator laws tied to sales thresholds, transaction numbers, and other requirements. It's worthwhile to familiarize yourself with these laws if you sell—or plan to sell—on a third-party marketplace.
06. Consult a tax professional and/or automated tax compliance software
Economic nexus laws can be confusing, particularly since they're always evolving. Enlisting the help of a tax professional or using automated tax compliance software (or both) can help you navigate the state-by-state tax requirements.
Automated tools like Avalara allow you to collect, file, and remit taxes quickly and accurately. It also saves time and reduces errors, since it integrates with common payment portals, bookkeeping tools, and online selling platforms like Stripe, Quickbooks, and Wix.
Embrace the nexus
As an eCommerce business owner, you have a lot more things to think about than what products to sell and how to reach customers. There are (dare we say) less sexy things to consider, including taxes and business insurance.
Working with vendors that provide integrated tools and information can help you manage this burden so that you’re better prepared when tax season rolls around.
No matter what your economic situation is, nexus compliance should be taken seriously. Make sure you track all sales in different states, obtain the necessary permits, understand marketplace facilitator laws, and stay vigilant.
Editor, Wix for eCommerce
Allison is the editor for the Wix eCommerce blog, with several years of experience reporting on eCommerce news, strategies, and founder stories.