The Ultimate Guide to Understanding Economic Nexus

Guide

7 steps for preparing your business for sales tax compliance & automation

Step 4

Register for sales tax permits in new economic nexus states06

Step 6

Flip the switch on all your sales channels07

Table of Contents

Introduction

Step 1

Ensure you’re complying with existing sales tax nexus laws

Step 2

Determine in which states you have economic nexus

03

04

Step 3

Educate yourself about product taxability in new states 06

Step 5

Factor in marketplace facilitator laws06

05

Step 7

Address opportunities stemming from economic nexus07

The Ultimate Guide to Understanding Economic Nexus | 2

Introduction

Until 2018, sales tax nexus generally meant “physical presence.” Essentially, your company was required to have a significant physical presence in a state to be on the hook to collect and remit sales tax on its products.

But everything changed with the South Dakota v. Wayfair Supreme Court case in 2018. Now, states can require businesses with both physical presence and “economic nexus” in a state to collect sales tax. In other words, now businesses that simply exceed a state-mandated sales volume in a state must register and collect sales tax from buyers in that state.

For the financial controllers of large companies this is more than just a new wrinkle to the law. Sales tax nexus in just one new state can mean major changes to your company’s financial processes. Depending on the size of your business and your product mix, the Wayfair ruling may mean you are required to collect sales tax in a handful or even dozens of additional states.

You’re probably asking yourself where to get started on these new economic nexus laws. We’ve put together seven tips you can follow to ensure you’re prepared in this changing landscape.

Step 1

Ensure you’re complying with existing sales tax nexus laws

The Supreme Court’s decision in South Dakota v. Wayfair makes sales tax nexus more complex, but some things remain the same.

Economic nexus is just a new type of nexus. But physical nexus hasn’t gone anywhere.

Ensure you are still sales tax compliant in states where you have physical nexus by registering for a sales tax permit, collecting and remitting sales tax.

Business factors that create physical nexus include:

Physical presence can mean a number of things, including:

• Having an office

• Having an employee

• Having a warehouse

• Having an affiliate

• Storing inventory

• Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair

Affiliate

OfficeEmployee

Drop ship 3rd party

Temp business

Warehouse

Inventory

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You can read about each state’s individual economic nexus law along with its sales and transactions threshold here.

With states on the hunt for sales tax, it’s critical that businesses identify new states in which they might have nexus. You can do this by performing a deep dive into your business’s sales numbers or simply using TaxJar’s free Sales & Transactions Checker.

Step 2

Determine in which states you have economic nexus

Sales tax is governed at the state level. While most states quickly passed an economic nexus sales tax law in the wake of the Wayfair decision, each state’s law is slightly different.

Economic nexus sales thresholds range from $10,000 to $500,000 in sales. Some states have also added a volume threshold.

For example, in Illinois a business that has grossed over $100,000 in sales in the previous twelve months or made more than 200 sales to buyers in Illinois in the previous twelve months has economic nexus and is required to comply with sales tax laws.

Economic nexus law active DE, MT, NH and OR have no sales tax

No legislation yet

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Here’s a list of common item types that may not be taxable in some states:

• Grocery food

• Clothing

• Certain books (textbooks, religious books, etc.)

• Prescription and nonprescription medicine

• Supplements

• Magazines and subscriptions

• Digital products (books, music, movies, etc.)

Step 3

Educate yourself about product taxability in new states

States also make their own rules and laws about which products are taxable. In most states, tangible personal property is taxable.

That includes everything from toothbrushes to furniture to dog collars. But some states make an exception for items deemed as necessities, like food or clothing. States may tax those items at a lower rate, or not tax them at all.

This is just a general list to get you started. Check with the state taxing authority in question if you think any of your company’s products might be exempt or taxed at a lower rate.

Step 4

Register for sales tax permits in new economic nexus states

Once you’ve realized that you have economic nexus in a new state, you must register for a sales tax permit in that state. (Don’t start to collect sales tax until you complete this step. It is illegal in most states to collect sales tax without receiving your permit first.)

You’ll start by contacting the state’s taxing authority (i.e. Department of Revenue, Tax Agency, or Tax Commission, etc.) From there, you’ll need to register for a sales tax permit yourself, or hire a professional to register for your state sales tax permits for you.

Processing times will vary depending on the state. If you file online, you can sometimes receive a tax permit number instantly. If you register by paper methods, it might take up to four weeks to receive your permit.

Step 5

Factor in marketplace facilitator lawsMany states have passed laws requiring marketplace facilitators like Amazon and Walmart to collect and remit sales tax on behalf of their third-party sellers. But even when a marketplace collects on your behalf, you’re still required to collect sales tax from your buyers when selling in your own online store or a brick and mortar store.

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Step 6

Flip the switch on all your sales channels

As soon as you’ve got your news sales tax permits, it’s time to start sales tax collection for your new economic nexus states on all your sales channels. If you need help with a specific platform, visit TaxJar’s Sales Tax 101 headquarters, which features channel specific sales tax guides, including BigCommerce, Magento, Amazon, Shopify, WooCommerce and more.

Step 7

Address opportunities stemming from economic nexusPrior to the Supreme Court’s economic nexus decision, many organizations made business decisions based on avoiding creating sales tax nexus exposure. It wasn’t uncommon for nexus to factor into the locations of stores, inventory, and staff. As economic nexus forces your organization to collect sales tax in new states, consider any locations that might now be on the table. In pursuing those opportunities, you might find a silver lining in all of this change.

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How TaxJar can help

Now that you understand economic nexus, you can turn to the #1 sales tax automation software, TaxJar. Trusted by more than 20,000 e-commerce sellers, developers and accounting professionals, we focus on solving a problem no one wants to deal with - sales tax. We obsessively leverage technology and exceptional customer service to help you focus on what matters most - growing your business.

Give us 30 minutes to show you how we can help and schedule a demo today.