If you are an online seller or have an ecommerce store, you may have heard of the term “economic nexus” and wondered what it means for your business. Economic nexus is a concept that determines whether you have to collect and remit sales tax in a state based on your sales activity in that state. In this article, we will explain what economic nexus is, how it works, and how it affects your sales tax obligations in each US state. We will also provide some tips and tools to help you comply with the economic nexus laws and avoid any penalties or audits.
Economic Nexus: Definition, State Thresholds, and Compliance Tips for Online Sellers
How Economic Nexus Works
Sales tax is a tax imposed by state and local governments on the sale of goods and services. The seller is responsible for collecting the tax from the buyer and remitting it to the tax authorities. However, not every seller has to collect sales tax in every state. The seller has to have a connection or a presence in the state, known as “nexus”, to be required to collect sales tax.
Traditionally, nexus was based on physical presence, such as having a store, an office, an employee, or a warehouse in the state. However, with the rise of online commerce, many states have adopted a new type of nexus based on economic presence, known as “economic nexus”. Economic nexus is triggered when a seller reaches a certain amount of sales revenue and/or transaction volume in a state, regardless of whether the seller has any physical presence in the state. This means that if you sell online to customers in a state where you have economic nexus, you have to collect and remit sales tax in that state.
How Economic Nexus is Triggered
Each state has its own threshold and criteria for economic nexus. Generally, the threshold is based on either or both of the following factors:
- Sales revenue: The total amount of sales made in the state in a given period, usually a calendar year or the previous 12 months.
- Transaction volume: The number of transactions or orders made in the state in a given period, usually a calendar year or the previous 12 months.
For example, Alabama has an economic nexus threshold of $250,000 in sales revenue in the previous calendar year, while Colorado has an economic nexus threshold of $100,000 in sales revenue or 200 transactions in the previous calendar year.
This means that if you sell more than $250,000 worth of goods or services to customers in Alabama, or more than $100,000 worth of goods or services or 200 transactions to customers in Colorado, you have economic nexus in those states and have to collect and remit sales tax there.
How Economic Nexus Affect Your Business
Depending on your business model and sales activity, economic nexus may apply to you in different ways. Here are some examples of how economic nexus may affect your business:
- If you sell through your own website or platform, you have to track your sales and transactions in each state and determine if you have economic nexus in any of them. If you do, you have to register for a sales tax permit, collect and remit sales tax, and file sales tax returns in those states.
- If you sell through a third-party marketplace, such as Amazon, eBay, or Etsy, you may not have to worry about economic nexus in some states. This is because some states have enacted “marketplace facilitator” laws that require the marketplace to collect and remit sales tax on behalf of the sellers who use their platform. However, not all states have marketplace facilitator laws, and some states have different rules for different types of marketplaces. Therefore, you still have to check the laws and policies of each state and each marketplace you sell on and comply with the applicable requirements.
- If you sell digital products, such as software, ebooks, or online courses, you may also have to deal with economic nexus in some states. This is because some states tax digital products as tangible personal property, while others tax them as services or do not tax them at all. Therefore, you have to know the taxability of your products in each state and whether you have economic nexus in those states based on your sales revenue and/or transaction volume.
Economic Nexus Thresholds for Sales Tax in Every State
As of February 2024, 44 states and the District of Columbia have enacted economic nexus laws, following the landmark Supreme Court decision in South Dakota v. Wayfair in 2018. The only states that do not have economic nexus laws are Florida, Kansas, Missouri, New Hampshire, Oregon, and Texas. However, some of these states may adopt economic nexus laws in the future, so you should always stay updated on the latest developments.
The table below shows the economic nexus thresholds and effective dates for all the states that have economic nexus laws, as well as the links to the official sources for more information. Please note that the information in this table is subject to change and may not reflect the most current or accurate data. You should always consult the state tax authorities or a tax professional for the latest and specific guidance.
| State | Threshold | Effective Date | Source |
|---|---|---|---|
| Alabama | $250,000 in sales | October 1, 2018 | Alabama Department of Revenue |
| Alaska | $100,000 in sales or 200 transactions | January 1, 2019 | Alaska Remote Seller Sales Tax Commission |
| Arizona | $200,000 in sales in 2019, $150,000 in 2020, $100,000 in 2021 and thereafter | October 1, 2019 | Arizona Department of Revenue |
| Arkansas | $100,000 in sales or 200 transactions | July 1, 2019 | Arkansas Department of Finance and Administration |
| California | $500,000 in sales | April 1, 2019 | California Department of Tax and Fee Administration |
| Colorado | $100,000 in sales or 200 transactions | December 1, 2018 | Colorado Department of Revenue |
| Connecticut | $100,000 in sales and 200 transactions | December 1, 2018 | Connecticut Department of Revenue Services |
| Delaware | No sales tax | N/A | N/A |
| District of Columbia | $100,000 in sales or 200 transactions | January 1, 2019 | District of Columbia Office of Tax and Revenue |
| Florida | No economic nexus law | N/A | N/A |
| Georgia | $250,000 in sales or 200 transactions | January 1, 2019 | Georgia Department of Revenue |
| Hawaii | $100,000 in sales or 200 transactions | July 1, 2018 | Hawaii Department of Taxation |
| Idaho | $100,000 in sales | June 1, 2019 | Idaho State Tax Commission |
| Illinois | $100,000 in sales or 200 transactions | October 1, 2018 | Illinois Department of Revenue |
| Indiana | $100,000 in sales or 200 transactions | October 1, 2018 | Indiana Department of Revenue |
| Iowa | $100,000 in sales or 200 transactions | January 1, 2019 | Iowa Department of Revenue |
| Kansas | No threshold | October 1, 2019 | Kansas Department of Revenue |
| Kentucky | $100,000 in sales or 200 transactions | October 1, 2018 | Kentucky Department of Revenue |
| Louisiana | $100,000 in sales or 200 transactions | July 1, 2020 | Louisiana Department of Revenue |
| Maine | $100,000 in sales or 200 transactions | July 1, 2018 | Maine Revenue Services |
| Maryland | $100,000 in sales or 200 transactions | October 1, 2018 | Maryland Comptroller |
| Massachusetts | $500,000 in sales and 100 transactions | October 1, 2017 | Massachusetts Department of Revenue |
| Michigan | $100,000 in sales or 200 transactions | October 1, 2018 | Michigan Department of Treasury |
| Minnesota | $100,000 in sales or 100 transactions | October 1, 2018 | Minnesota Department of Revenue |
| Mississippi | $250,000 in sales | September 1, 2018 | Mississippi Department of Revenue |
| Missouri | No economic nexus law | N/A | N/A |
| Montana | No sales tax | N/A | N/A |
| Nebraska | $100,000 in sales or 200 transactions | January 1, 2019 | Nebraska Department of Revenue |
| Nevada | $100,000 in sales or 200 transactions | October 1, 2018 | Nevada Department of Taxation |
| New Hampshire | No sales tax | N/A | N/A |
| New Jersey | $100,000 in sales or 200 transactions | November 1, 2018 | New Jersey Division of Taxation |
| New Mexico | $100,000 in sales | July 1, 2019 | New Mexico Taxation and Revenue Department |
| New York | $500,000 in sales and 100 transactions | June 21, 2018 | New York Department of Taxation and Finance |
| North Carolina | $100,000 in sales or 200 transactions | November 1, 2018 | North Carolina Department of Revenue |
| North Dakota | $100,000 in sales or 200 transactions | October 1, 2018 | North Dakota Office of State Tax Commissioner |
| Ohio | $100,000 in sales or 200 transactions | August 1, 2019 | Ohio Department of Taxation |
| Oklahoma | $100,000 in sales | July 1, 2018 | Oklahoma Tax Commission |
| Oregon | No sales tax | N/A | N/A |
| Pennsylvania | $100,000 in sales | July 1, 2019 | Pennsylvania Department of Revenue |
| Rhode Island | $100,000 in sales or 200 transactions | August 17, 2017 | Rhode Island Division of Taxation |
| South Carolina | $100,000 in sales | November 1, 2018 | South Carolina Department of Revenue |
| South Dakota | $100,000 in sales or 200 transactions | November 1, 2018 | South Dakota Department of Revenue |
| Tennessee | $500,000 in sales | October 1, 2019 | Tennessee Department of Revenue |
| Texas | No economic nexus law | N/A | N/A |
| Utah | $100,000 in sales or 200 transactions | January 1, 2019 | Utah State Tax Commission |
| Vermont | $100,000 in sales or 200 transactions | July 1, 2018 | Vermont Department of Taxes |
| Virginia | $100,000 in sales or 200 transactions | July 1, 2019 | Virginia Tax |
| Washington | $100,000 in sales or 200 transactions | October 1, 2018 | Washington Department of Revenue |
| West Virginia | $100,000 in sales or 200 transactions | July 1, 2019 | West Virginia State Tax Department |
| Wisconsin | $100,000 in sales or 200 transactions | October 1, 2018 | Wisconsin Department of Revenue |
| Wyoming | $100,000 in sales or 200 transactions | February 1, 2019 | Wyoming Department of Revenue |
Other Ways to Determine your Sales Tax Obligations in Each State
While the economic nexus thresholds and effective dates are the main factors to consider when determining your sales tax obligations in each state, there are also some other variations and nuances that you should be aware of. For example:
Some states have different types of sales that are included or excluded from the economic nexus calculation. For instance, some states include sales of taxable and non-taxable products, while others only include sales of taxable products. Some states also exclude sales made through a marketplace facilitator, while others do not.
Some states have different measurement periods for the economic nexus calculation. For instance, some states use a calendar year, while others use the previous 12 months. Some states also have a rolling or trailing basis, while others have a fixed or current basis. This means that you have to monitor your sales and transactions in each state on a regular basis and adjust your compliance accordingly.
Some states have different registration and filing requirements for sellers who have economic nexus. For instance, some states require you to register for a sales tax permit before you start collecting sales tax, while others allow you to register after you have exceeded the threshold. Some states also have different filing frequencies and due dates for sales tax returns and payments, depending on your sales volume and tax liability.
How to Comply with Economic Nexus Laws
If you have determined that you have economic nexus in one or more states, you have to take the following steps to comply with the economic nexus laws:
1. Track your sales and transactions in each state. You have to keep track of your sales revenue and transaction volume in each state where you sell and compare them with the economic nexus thresholds. You can use a spreadsheet, a sales report, or a sales tax software to help you with this task. You should also update your records regularly and review them periodically to see if you have triggered economic nexus in any new states or if you have lost nexus in any existing states.
2. Register for a sales tax permit in each state where you have nexus. You have to register for a sales tax permit or a license in each state where you have economic nexus and obtain a sales tax identification number. You can do this online, by mail, or in person, depending on the state. You should also check the registration fees and the processing time for each state and complete the registration process as soon as possible.
3. Collect and remit sales tax according to the state rates and rules. You have to collect sales tax from your customers in each state where you have economic nexus and remit the tax to the state tax authorities. You have to apply the correct sales tax rate and rules for each state, which may vary depending on the product type, the customer location, the shipping method, and other factors. You can use a sales tax calculator, a sales tax table, or a sales tax software to help you with this task. You should also keep track of the sales tax collected and remitted in each state and report any changes or adjustments as needed.
4. You have to file sales tax returns and pay the taxes due in each state where you have economic nexus, according to the filing frequency and due date assigned by the state. You can do this online, by mail, or in person, depending on the state. You should also check the filing forms and the payment methods for each state and complete the filing and payment process on time and accurately. You should also keep copies of your sales tax returns and payments for your records and reference.
5. Keep records of your sales and tax activities. You have to keep records of your sales and tax activities in each state where you have economic nexus, such as invoices, receipts, sales reports, tax returns, tax payments, and correspondence with the state tax authorities. You should also keep these records for at least three to six years, depending on the state, in case of an audit or a dispute. You should also organize and store these records securely and accessibly, either electronically or physically.
Tips and Tools to Simplify and Automate the Compliance Process
Complying with the economic nexus laws can be a daunting and time-consuming task, especially if you have nexus in multiple states. Fortunately, there are some tips and tools that can help you simplify and automate the compliance process, such as:
1. Using a sales tax software or a marketplace facilitator. Our robust sales tax software (AtomicTax) can help you track your sales and transactions in each state, calculate and collect the correct sales tax rate and rules for each state, file and pay your sales tax returns and taxes in each state, and keep records of your sales and tax activities in each state.
A marketplace facilitator is a platform that can help you sell your products online and collect and remit sales tax on your behalf in some states. Some examples of sales tax software are AtomicTax, Avalara, TaxJar, and Vertex. Some examples of marketplace facilitators are Amazon, eBay, and Etsy.
2. Hiring a sales tax professional or a CPA. A sales tax professional or a certified public accountant (CPA) is a person who can help you understand and comply with the economic nexus laws in each state, advise you on the best practices and strategies for your business and situation, represent you in case of an audit or a dispute, and handle any other sales tax issues or questions that you may have.
Conclusion
Economic nexus is a concept that determines whether you have to collect and remit sales tax in a state based on your sales activity in that state. It is a crucial factor to consider if you are an online seller or have an ecommerce store, as it can affect your sales tax obligations in each US state.
In this article, we have explained what economic nexus is, how it works, and how it affects your business. We have also provided a table that shows the economic nexus thresholds and effective dates for all the states that have economic nexus laws, as well as some variations and nuances among the states. We have also explained the steps to take to comply with the economic nexus laws, and provided some tips and tools to simplify and automate the compliance process.
We hope that this article has helped you understand and comply with the economic nexus laws and avoid any penalties or audits.
If you have any questions or comments about this article, please feel free to leave them below. We would love to hear from you and help you with your sales tax needs. Thank you for reading.