If you’re an e-commerce business owner, you’ve likely heard the term nexus in relation to sales tax. But do you understand its meaning? And how it affects your business?
If you haven’t read my previous article about sales-tax, it may be a good idea to start there.
Whether you’re selling handmade candles or running a large online store, nexus is now a key piece of the tax puzzle. It’s no longer just about your physical location. Nexus rules have expanded, especially with the rise of online shopping.
Ignoring these rules could lead to penalties, back taxes, and unnecessary headaches.
What Is Nexus and Why Does It Matter?
Nexus is a legal term that defines a business’s connection to a state. If you have nexus in a state, you must collect and remit sales tax for that state. Traditionally, nexus applied only if you had a physical presence there — a warehouse, office, or storefront.
However, the 2018 South Dakota v. Wayfair Supreme Court ruling changed everything. It introduced economic nexus, meaning businesses can be taxed in states where they don’t have a physical presence but conduct significant sales.
Economic Nexus: The New Frontier
Under the Wayfair ruling, states can impose sales tax obligations on out-of-state businesses. This applies even if your business doesn’t have a physical presence. If your e-commerce business sells a certain amount of goods or services in a state, you must collect sales tax from customers in that state.
For example, let’s say your Florida-based online store makes $100,000 in sales in California in a year. Even without an office or warehouse in California, you may need to collect California sales tax because you’ve surpassed the threshold.
How Nexus Affects E-commerce Businesses
More than 40 states now have economic nexus laws. It’s not just about where you’re physically located anymore. You need to track your customers’ locations and your sales volume in each state.
This creates multistate sales tax obligations for e-commerce businesses. And every state has its own rules. What works in one state might not apply in another. Keeping track of all these rules can be overwhelming, especially if you sell across multiple states.
Common Pitfalls for E-commerce Businesses
As promising as e-commerce can be, it also comes with its own set of tax landmines. Many online business owners don’t realize how easy it is to stumble into costly mistakes simply because the rules feel invisible in the digital space.
Before diving deeper into the subject, it’s worth taking a step back and highlighting some of the most common pitfalls that trip up e-commerce entrepreneurs. These aren’t rare, one-off issues… they’re patterns the IRS and state agencies see all the time, and they can quietly erode profits if left unchecked.
Ignoring State-Specific Thresholds:
Many businesses think they only need to worry about states where they have a physical presence. But that’s no longer true. Each state has its own nexus threshold based on sales or transaction volume.
Not Updating Sales Tax Collection Systems:
New nexus laws are popping up frequently. Your systems must be set up to collect and remit sales tax in the correct states. Failing to update your systems could lead to errors and penalties.
Underestimating the Complexity of Compliance:
Once your sales stretch across multiple states, things get tricky. Sales tax rates vary by state and even county. Each jurisdiction has different rules for which products or services are taxable. Tracking all of this manually can be difficult.
Not Documenting Sales Tax:
Good record-keeping is essential when you have nexus in multiple states. You need to track what you’ve collected and remitted. This also includes keeping records of the products or services you’ve sold to avoid issues during audits.
How to Stay Compliant with Sales Tax Nexus
So, what can you do to stay compliant? Take these steps:
Understand Your Nexus Obligations
Know exactly where your business has nexus. If you’re unsure, check if you’ve exceeded the economic nexus thresholds in any state. Each state sets its own sales or transaction limits, so make sure you’re clear on them.
Track Your Sales by State
You need a system to track your sales. E-commerce platforms like Shopify and BigCommerce can help you monitor which states you’re selling to. Tracking sales volume by state helps ensure you stay compliant with local laws.
Register for Sales Tax in Required States
Once you determine you have nexus in a state, you must register with that state’s tax department. After registration, you’ll need to collect sales tax on taxable sales to customers in that state.
Use Sales Tax Software or Automation Tools
Sales tax can be a headache without the right tools. Services like Avalara and TaxJar automate sales tax calculations and filings. These platforms ensure you’re applying the correct rate and filing on time.
Stay Updated
Sales tax laws change regularly. States might update tax rates, new product taxability rules, or adjust nexus thresholds. Stay informed to ensure your business remains compliant.
Final Thoughts
Sales tax nexus is crucial for e-commerce business owners. With economic nexus laws now in place, it’s vital to understand where your business has sales tax obligations and how to stay compliant.
If you’re unsure about nexus or need help navigating compliance, consider consulting a tax professional who specializes in e-commerce.
Staying compliant isn’t just about avoiding penalties; it ensures your business operates smoothly and can focus on growth and customer service.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
