You do not owe sales tax in a state until you have nexus, a connection strong enough to create a sales tax obligation. Physical presence comes from people and property, including inventory you own sitting in a 3PL. Economic nexus comes from how much you sell, usually 200 transactions or $100,000, with bigger states like New York, Texas, and California at $500,000. Kelley Birrell explains both, and when the obligation actually starts.
Sales Tax
Ecommerce Sales Tax: When Do Sellers Need to Collect?
3 min
Transcript
0:00 What triggers a sales tax obligation
Hi ecommerce sellers. A question we get all the time is when you need to start worrying about sales tax. I'm Kelley Birrell with LedgerGurus, and in this video I'm going to tell you exactly what triggers a sales tax registration and filing obligation for ecommerce sellers.
So the core concept is called nexus. It means that you have a connection or a link with something. So in this case, if you have nexus with a state, that means that you have a strong enough connection with that state in order to have a sales tax obligation. If you don't have nexus, there's no need to deal with sales tax yet.
0:29 Physical presence nexus
Now this connection for ecommerce businesses is usually created in one of two ways. The first is physical presence. Think people and property.
As an ecommerce seller, ask yourself, in terms of people, where is my company located, where are my employees, and where are my salespeople. In terms of property, think, where do I have company-owned vehicles, where are my warehouses and my offices, and where is my inventory stored.
Now remember, whether you store your inventory in your own warehouse or in a 3PL, if you own that inventory then it is creating a physical presence for you. Having any of these in a state means that you do need to register and start collecting sales tax on every sale into that state.
1:09 Economic nexus thresholds
The second layer is economic nexus. This means that you have a strong enough economic connection with that state that it can require you to start collecting sales tax.
Now a little more than half of the states use the standard of 200 transactions or $100,000 in gross sales into that state in the past calendar year. Bigger states like New York, Texas, California, their threshold is $500,000. And there are some states like Connecticut where both of the requirements have to be met in order for you to have nexus in that state. So the question to ask yourself to determine if you have economic nexus is, how much am I selling into this state?
1:45 You owe nothing before you cross
Now please note, because we get this question all the time, you are not responsible for sales tax on sales made before you hit that threshold. It is only after that threshold that you're responsible for it.
So for example, in many states you are not responsible for sales tax on the first $100,000 of gross sales or the first 200 transactions. But after you pass that threshold, you are now responsible to register and collect sales tax in that state.
2:10 The 10 steps guide
Now if this seems a little bit confusing, we do have a link in the description below for our sales tax guide to ensure that sales tax does not burn down your ecommerce business. That guide contains the 10 steps that you need to follow in order to be sales tax compliant in any state where you have nexus. And at the end of that guide is a chart of all the economic thresholds by state. You can use it to evaluate where your nexus footprint is so you can decide where you're going to register your business for sales tax.
If you found this video helpful, be sure to like it and subscribe so you can receive more of our ecommerce accounting advice. See you in the next video. Bye.