Sales Tax Nexus for Online Business: An Essential Guide

Sales tax compliance is an ever-present challenge for businesses of all sizes, but few aspects are as important as sales tax nexus. Nexus determines where businesses must collect and remit sales tax, and understanding it is critical for managing your tax obligations effectively. With economic and technological shifts reshaping commerce, sales tax nexus has become a cornerstone of tax collection and compliance, especially for ecommerce businesses.

Unpacking Sales Tax Nexus: What is It?

Sales tax nexus is a legal term that describes the connection a business must have with a state before that state can require it to collect and remit sales tax. Traditionally, nexus was tied to physical presence—a store, office, or warehouse within state lines. However, with the rise of e-commerce, the definition has expanded.

The 2018 Supreme Court ruling in South Dakota v. Wayfair fundamentally changed tax policy by establishing that physical presence is no longer the sole factor for creating nexus. Instead, states can now impose sales tax obligations based on economic activity, even if a business doesn’t have a physical presence within their borders.

For example, many states enforce thresholds based on sales revenue or the number of transactions. Crossing these thresholds creates an economic nexus, requiring businesses to collect and remit sales tax in those states. This shift has impacted online sales, digital service providers, and businesses operating in multiple jurisdictions.

Physical Nexus vs. Economic Nexus

Understanding the distinction between physical and economic nexus is essential for compliance. Here are the differences:

• Physical Nexus: This occurs when a business has tangible ties to a state, such as a storefront, employees, or inventory stored in a warehouse. States like California and Texas use physical presence as a foundational nexus criterion alongside other economic considerations.
• Economic Nexus: This applies to businesses generating revenue or conducting a certain number of transactions within a state, regardless of physical presence. For example, states like South Dakota require businesses to collect sales tax if they exceed $100,000 in annual sales or 200 transactions in the state. The thresholds differ among jurisdictions, so understanding individual state tax laws is crucial.

The challenge of managing both types of nexus grows as businesses expand their reach, underscoring the importance of tools and resources that streamline compliance. For example, businesses must carefully track sales to determine where they meet nexus thresholds and ensure they comply with tax collection requirements. For more information about state rules regarding sales tax nexus, you can visit Kintsugi’s Tax by State Guide.

Why Sales Tax Nexus Matters

Sales tax nexus isn’t just a technical detail—it directly impacts your bottom line and legal standing. Failure to comply with nexus-related obligations can result in penalties, audits, and reputational harm. Beyond avoiding risks, understanding nexus can also present opportunities. For instance, businesses can leverage insights into their nexus to optimize their supply chains or identify new markets for expansion.

Moreover, states increasingly rely on sales tax revenue to fund essential services like education and infrastructure. Staying compliant protects your business and supports the communities where you operate. The Supreme Court’s ruling on economic nexus has expanded the scope of tax collection, reinforcing the importance of accurate tracking and reporting of taxable transactions.

The Role of Marketplace Facilitators

Marketplace facilitators—platforms like Amazon, Etsy, and eBay—have added another layer to the sales tax nexus conversation. These platforms often collect and remit sales tax on behalf of their sellers, but this doesn’t entirely eliminate a business’s responsibilities. In this section, you will learn more about marketplace facilitators.

A marketplace facilitator does the following:

• Lists products or services for sale on behalf of third-party sellers

• Processes payments for those sales

• Provides fulfillment services, like shipping or delivery

• Handles returns or customer service on behalf of sellers

What Do Marketplace Facilitators Do Under Nexus Laws?

Once a state enacts a marketplace facilitator law, the facilitator is required to:

1. Register for a sales tax permit in that state.

2. Collect sales tax at the point of sale on behalf of third-party sellers.

3. Remit the collected tax to the state tax authority.

4. File sales tax returns, typically separate from their own direct sales.

For third-party sellers, this is generally good news—it simplifies tax compliance for three reasons:

• The platform collects and remits sales tax on their behalf.

• Sellers don’t need to register in every state where they have sales through marketplaces.

• They can focus on growing their business, while the facilitator handles complex tax requirements.

However, sellers may still need to collect tax on direct sales from their own website or POS system, and they may be required to file informational returns in some states. So, sellers must still monitor their overall sales activity to ensure compliance with states where marketplace transactions and direct sales combined create nexus.

Steps to Ensure Compliance

1. Identify Your Nexus Footprint: Map out your physical and economic presence across states. Use tools to monitor transaction volumes and revenue thresholds to determine where nexus exists.
2. Register for Sales Tax Permits: Once nexus is established in a state, you must register for a sales tax permit before collecting tax. Each state has its own process, so be sure to follow the specific requirements.
3. Implement Accurate Tax Collection: Use automation technology to calculate and collect the correct sales tax rates for each jurisdiction. This includes local sales taxes, which can vary within a state.
4. Automate Tax Filing: It is critical to file sales tax returns accurately and on time. Tax automation platforms simplify this process by aggregating data and submitting filings on your behalf.
5. Stay Updated on Policy Changes: States frequently adjust their tax laws and nexus thresholds. Regularly reviewing updates or subscribing to tax compliance resources ensures you stay ahead of changes. For instance, understanding how use tax applies to your business operations can prevent compliance gaps.

The Future of Sales Tax Nexus

The nexus landscape will continue to evolve as commerce and legislation advance. States may refine their economic nexus laws to address emerging business models, and federal regulation could create uniform standards nationwide. Businesses should anticipate these shifts and invest in tools and partnerships that support long-term compliance.

Sales tax automation platforms like Kintsugi can simplify compliance by providing tools that can help you track your nexus in real time, automatically calculate your sales tax, and file. As nexus rules become increasingly complicated, these solutions are indispensable for businesses navigating the modern tax environment.

Manage Nexus Obligations With Kintsugi

A sales tax automation tool like Kintsugi helps retailers easily track where they have nexus based on sales volume and transaction thresholds. It monitors state-specific economic nexus rules and alerts businesses when they trigger new obligations.

Here’s an overview of how Kintsugi can help you with your nexus obligations.

1. Economic Nexus Details

Kintsugi monitors each state’s economic nexus thresholds—including sales revenue and transaction count—and provides real-time updates as rules change. This ensures retailers know when they’re approaching or exceeding nexus thresholds.

2. Nexus Analysis Report

Kintsugi generates a comprehensive nexus analysis report that shows where a business currently has a nexus and where it’s close to establishing one. The report includes transaction details, thresholds met, and other essential insights to help retailers make informed decisions about tax registration and compliance strategies.

3. Track Met Dates for All Nexus Types

Whether it’s a physical, economic, or marketplace facilitator nexus, Kintsugi tracks the exact dates the nexus is established in each state. This allows businesses to register and collect sales tax on time, avoiding penalties and back taxes.

Aside from nexus monitoring, Kintsugi automatically calculates the correct sales tax rate for each transaction, ensuring compliance across all jurisdictions. It also manages sales tax collection, filing, and remittance on behalf of the retailer. This reduces the risk of errors, audits, and penalties.

By automating complex tax processes, Kintsugi saves time and ensures retailers stay compliant as their business grows. So, book a demo or sign up with Kintsugi today.