Where Do You Owe Sales Tax? The 4 Questions Every Seller Must Ask

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But first, let's talk about nexus. Now, the word may sound complicated, but it's really just a fancy way of saying connection. If you have nexus with a state, it means that you have a strong enough connection that that state can require you to collect and remit sales tax for customers who live there. If you don't, then you're off the hook. Simple enough.

Now, understanding nexus is how you know where you're on the hook for sales tax and where you're not. If you want a deeper dive on it, what it is, how it works, and how to track it, we've got you covered. I've linked both our blog post and a full video walkthrough in the description so you can really get your head around it.

There are really two main types of nexus that you need to know: physical presence and economic nexus.

1:19 Question one: physical presence

So, the first question in that four question framework is to ask yourself, do I have a physical presence? Ask yourself, do I live in or have employees or remote workers in a state? Where do I store my inventory, like Amazon FBA warehouses or 3PLs? Do I lease office space in another state? If the answer to any of those is yes, then you have physical nexus and you need to register and start collecting sales tax in that state from day one.

1:44 Question two: economic nexus

The second part of the framework is to ask yourself, do I have economic nexus? Well, this depends on how much you sell into a state. Many, but not all, states set their economic nexus thresholds at $100,000 in revenue or 200 transactions in a calendar year. Once you cross either of those lines, you now have a sales tax collection responsibility in that state, and you must start collecting on the next sale, even if you don't have a physical presence.

Like I said, not all states have the same thresholds. You can find a complete list of economic thresholds by state, plus other pertinent information, in our free download, 10 Steps to Ensure Sales Tax Doesn't Burn Down Your Ecommerce Business. The link is in the description.

Now, one thing to consider. If you're brand new, you might not need to worry about this yet. If you're selling a small number of higher priced items, it could take a while to cross these thresholds. But if you sell low cost items and lots of them, you might hit that 200 transaction limit fast.

Either way, I recommend doing a quarterly sales review. Look at your total revenue by state. Include all of your channels. We'll talk more about this in a minute. Count how many orders went to each state. See if you're creeping towards those economic thresholds.

3:00 Question three: are your products taxable?

Now, even if you do have nexus in a state, that doesn't always mean you have to collect anything yet. So, that's where the next two questions in the framework come in.

Question three is to ask yourself, are my products taxable? Just because you're selling something doesn't mean the state taxes it. Some states don't tax clothing, or they tax it above a certain price, groceries or supplements, digital products or SaaS, or medical or industrial equipment. Taxability varies widely by product and by state.

Your job isn't to memorize all the tax rules. Your job is to be an expert on what you sell. Sales tax engines like AvaTax or Shopify Tax take care of that for you. But you need to label your products correctly in the system. Why does that matter? Well, if you mislabel something as non-taxable when it actually is, you could end up owing that sales tax yourself out of your profits. Ouch.

3:43 Question four: which channels do you sell on?

Now, the last piece is understanding where your own sales tax involves your sales channels. Ask yourself, am I selling exclusively on marketplaces or do I sell on my own website?

Marketplaces like Amazon, Walmart, Etsy, and eBay are required to collect and remit sales tax on your behalf in most states. So, if you only sell through marketplaces and they're handling it, you're likely off the hook. But if you also sell through your own website like Shopify or WooCommerce, those sales are your responsibility.

And when figuring out whether you've hit the threshold in a state, you must count all of your sales, including the ones from marketplaces. For example, let's say that you sold $85,000 on Amazon and $20,000 on your Shopify site to customers in Illinois. Even though Amazon handles the tax for their sales, your total sales into Illinois are $105,000, which means you've passed the threshold. Now, Amazon still collects on their portion, but you're required to register and collect sales tax on your Shopify sales going forward.

4:43 Running the framework and the biggest mistake

So, let's run through the full framework again. Ask yourself these four questions for every state. Do I have a physical presence? Have I passed the economic nexus threshold? Are my products taxable? Am I selling exclusively on the marketplace or not? If the answer is yes to one or two, yes to three, and no to four, then congrats. You've just earned yourself a new filing responsibility.

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Now, here's the biggest mistake I see new sellers make: collecting sales tax before registering with the state. It seems innocent, right? You just want to do the right thing. So, you turn on all of your sales tax collections in all of your sales channels. But don't do it. It's illegal. It's a nightmare to clean up, and states get really cranky when you do it. Always, always, always register first, collect second, in that order.

5:33 Where to get help

Now that you know where you need to register, you might be wondering how to do that. Well, good news. We have a video that walks you step by step through registering for a sales tax permit. I'll link it here and in the description. And don't forget to grab your free copy of our guide, the 10 Steps to Ensure Sales Tax Doesn't Burn Down Your Ecommerce Business. You'll find all the state thresholds, a checklist of what to pay attention to, and more.

And if this all feels overwhelming, or if you're ready to hand it off, that's exactly what we do at LedgerGurus. We help ecommerce businesses register, file, and manage sales tax so you can stay focused on what you actually want to do: growing your business. Because honestly, we've never yet met a seller who's like, "Yes, I get to do sales tax."

Now, if this helped, give it a like, share it with a fellow seller, and let me know in the comments what's tripping you up about sales tax.