What is Sales Tax Nexus?
"Nexus" is the legal term for having sufficient presence or connection in a state that requires you to collect and remit sales tax there. Understanding nexus is critical for any startup that sells products or services across state lines.
Types of Nexus
#
Physical Nexus
Physical nexus is established when your company has a tangible presence in a state. This can include:
- Having an office, warehouse, or store
- Employing people who live or work in the state
- Storing inventory in the state (including in Amazon FBA warehouses)
- Attending trade shows above a certain threshold
- Having sales representatives travel to the state
#
Economic Nexus
Since the 2018 Supreme Court decision in South Dakota v. Wayfair, states can also require sales tax collection based on economic activity, even without physical presence.
Each state sets its own economic nexus thresholds, but common triggers include:
- $100,000 in sales to the state, OR
- 200 transactions in the state
Some states use only a sales threshold, while others use both sales AND transaction counts.
State-by-State Thresholds
Here's a sample of economic nexus thresholds by state:
| State | Sales Threshold | Transaction Threshold |
|-------|-----------------|----------------------|
| California | $500,000 | None |
| Texas | $500,000 | None |
| New York | $500,000 | 100 |
| Florida | $100,000 | None |
| Washington | $100,000 | None |
When Do You Need to Register?
Once you've established nexus in a state, you typically need to:
1. Register for a sales tax permit
2. Collect sales tax on taxable sales to customers in that state
3. File regular sales tax returns (monthly, quarterly, or annually)
4. Remit the collected taxes to the state
SaaS and Digital Products
The taxability of SaaS (Software as a Service) and digital products varies significantly by state:
- Some states tax SaaS as tangible personal property
- Others exempt it entirely
- Some have specific categories for digital goods
This complexity makes it especially challenging for software startups to manage sales tax compliance.
Marketplace Facilitator Laws
If you sell through marketplaces like Amazon, Etsy, or Shopify, you may be relieved of some collection responsibilities. Most states now have marketplace facilitator laws that shift the sales tax collection obligation to the marketplace itself.
However, these laws typically only apply to sales through the marketplace—you're still responsible for direct sales.
How to Manage Sales Tax Compliance
1. **Monitor your nexus status**: Track your sales and physical presence in each state.
2. **Register promptly**: Once you establish nexus, register for a sales tax permit before your first taxable sale.
3. **Automate tax calculation**: Use a tax calculation service to apply the correct rates.
4. **File on time**: Missing filing deadlines can result in penalties and interest.
5. **Keep good records**: Maintain documentation of exemption certificates and all sales.
Conclusion
Sales tax nexus is one of the most complex areas of tax compliance for startups. As you grow and expand your customer base, staying on top of your nexus obligations becomes increasingly important.