For online sellers, staying compliant with sales tax laws isn’t just about collecting tax—it’s about knowing where and when to collect it. And that all starts with understanding sales tax nexus.
What Is Sales Tax Nexus?
Nexus is the legal connection between your business and a state that requires you to collect and remit sales tax. This connection can be created through economic activity—like reaching a sales threshold in a state—even if you don’t have a physical presence there.
But here’s the tricky part: every state sets its own rules, thresholds, and reporting requirements. Some are relatively simple, while others require more steps and detailed filings.
Real-World Examples of Nexus Rules
To illustrate just how varied these rules can be, here are three state examples. These are not outliers or exceptions—just a small sampling of how different states structure their sales tax requirements:
Indiana – A Straightforward Example
- Threshold: $100,000 in sales
- What to Do: Register and collect sales tax
- Easy to manage and fairly typical of many states
Tennessee – A Bit More Complex
- Threshold: $100,000 in sales
- Additional Considerations:
- Deduction breakdowns
- Location-based tax options
- Single article tax complications
- Specific reporting formats
California – A Detailed Reporting Example
- Threshold: $500,000 in sales
- What’s Required:
- Collect and report tax at the district and county level
- Submit multiple reporting schedules
- Meet prepayment requirements:
- Annual filers: Based on prior-year liability
- Quarterly filers: Based on current-month collections
These examples show how critical it is to review sales tax laws on a state-by-state basis to ensure compliance.
Product Taxability Matters Too
Sales tax compliance isn’t just about where you sell—it’s also about what you sell.
Each state determines what products and services are taxable, and digital products are one of the most inconsistent categories across the country. That means sellers must:
- Classify products by product code (or tax category) on their e-commerce platform
- Check each state’s tax rules to see if those products are taxable or exempt
Examples:
- Florida: Most digitally delivered products (like eBooks and downloads) are not taxable, as they are not considered tangible personal property.
- California: Similarly, purely digital products delivered electronically are generally tax-exempt.
- Illinois: On the other hand, Illinois treats many digital products as taxable, including streaming services, eBooks, and music downloads. If your business sells to customers in Illinois, you must collect and remit sales tax on these products.
Failing to properly classify your products or assuming uniform rules can lead to overcharging customers—or worse, collecting tax without the proper permit.
What Happens If You Ignore Nexus or Taxability Rules?
Skipping over your sales tax responsibilities can lead to:
- Penalties, fines, and back taxes
- Audits and state investigations
- Wage garnishment or legal action
As your e-commerce business grows, so do your obligations. Awareness is your best defense.
Simplify the Stress of Sales Tax
Managing sales tax across multiple states and product types can get overwhelming fast. That’s where we come in.
🗓 Book a free consultation to get help with:
- Nexus tracking
- Tax code mapping
- Sales tax filing and compliance systems
