Updated - Originally published March 18, 2025
Your responsibility to collect sales tax depends on what you’re selling, how much of it you’re selling, and where your customers live. For example, did you know there are only five states that don’t collect state-wide sales tax? Known as the NOMAD states (New Hampshire, Oregon, Montana, Alaska, and Delaware), these states rely more on property and income taxes to generate the revenue sales tax normally would. So any sales to customers in these states are not subject to sales tax.
Outside of those, however, your sales tax responsibility can get complicated in a hurry. Modern sales tax factors include nexus types, taxability rules, and best practices for managing changing obligations. The best place to start untangling all of this is nexus.
Understanding Your Sales Tax Nexus
Nexus is the determining factor for whether your business must collect and remit sales tax in a state. Each state has its own criteria, and your business (not the state) is responsible for tracking where you establish nexus and ensuring you stay compliant.
Categories of Nexus
Many business leaders assume nexus is solely determined by having a physical presence in a state. That’s not the case anymore. The landmark 2018 Supreme Court case South Dakota vs. Wayfair, Inc. re-shaped sales tax obligations across the United States. Now, you need to consider three different categories of nexus.
Physical Nexus
Your business can establish physical nexus in a state in a variety of ways, including:
- Property – Owning or renting offices or warehouses
- Staff – Employing in-person, remote, or independent contractors
- Inventory – Storing goods in third-party fulfillment centers
- Service – Delivering, installing, or repairing products
- Trade Shows – Conducting one-time or annual business operations
Economic Nexus
Your business will trigger economic nexus when you cross certain sales thresholds in a state, such as:
- Sales Revenue – Typically $100,000 or more annually
- Number of Transactions – Usually 200 or more annually
Affiliate Nexus
Also called click-through nexus, this occurs when your business generates sales through in-state affiliates or partners, including:
- Partner Agreements – In-state affiliates promoting products or services
- Referrals – Purchases made via affiliate links or advertisements
- Sales Thresholds – Gross receipts from referral sales reaching state-specific limits
What About Marketplace Facilitators?
If you sell on Amazon or Etsy, those types of platforms collect and remit sales tax on your behalf when nexus is established. This makes marketplace sales compliance much simpler (but you’ll still need to handle sales tax for non-marketplace sales in nexus states).
Taxability and Sales Tax Obligations
Beyond nexus, taxability—whether your products or services are subject to sales tax—varies by state and affects your obligations. While sales tax generally applies to tangible goods and some services, taxability rules can be complex.
Taxable vs. Non-taxable
- Taxable Items: States usually tax physical goods like clothing, electronics, and furniture, as well as certain services such as data processing and telecommunications.
- Non-taxable Items: Most services are generally exempt unless they are explicitly listed as taxable. However, some services may become taxable when they are bundled with a product, making the entire transaction taxable. To figure this out, you can use a true object test by following the chart below.
Industry-Specific Tax Exemptions
- Manufacturing Exemptions: Many states exempt manufacturing equipment and materials from sales tax to cut costs and boost local production.
- Additional Industry Exemptions: Specific industries—including agriculture, energy, and biotechnology—may also be exempt from sales tax to promote economic growth in specific states.
Digital Products and Services
- Digital Goods: Intangible products—such as ebooks, digital music and movies, and streaming services—may be subject to sales tax, depending on whether an individual state classifies them as a product or service.
- Software: Different types of software are typically taxed in different ways:
- Prewritten Software: As it is generally sold on physical media or downloaded on a device, prewritten software is often considered tangible and can therefore be considered taxable.
- Custom Software: When designed and developed for a specific buyer, custom software is typically considered to be exempt unless it is sold to someone other than the original buyer.
- Software-as-a-Service (SaaS): Subscription-based applications that do not require users to install, update, or maintain software on their devices vary from state to state in terms of definition and, therefore, taxability.
B2B vs. B2C
- B2B Transactions: Sales between businesses are usually taxable unless the buyer provides a resale certificate for tax exemption.
- B2C Transactions: Sales made from a business to a consumer are generally taxable, depending on how the state deems the product or service.
Sales Tax Collection and Compliance
After identifying your nexus and taxable products or services, you may need to collect and remit sales tax in multiple states. Let’s go over how to get started, including registering, setting up your systems, and staying compliant.
Sales Tax Permit Registration
- Gather Documentation: Collect required state-specific details like EIN, location, business type, and projected sales volume for your sales tax permit application.
- Complete Registration: Apply through the state revenue department or tax commission. Submit your application online for faster processing, and be prepared to display approved permits if the state requires it.
Setting Up Sales Tax Systems
- Jurisdictional Variables: Within some states, different jurisdictions have the option of imposing additional taxes on top of state sales tax, so make sure that you are aware of what is taxable within the state as well as any additional tax rates based on jurisdiction.
- Sales Tax Integration: Update your sales platform or point-of-sale system so it calculates and collects sales tax in the states where you’ve established nexus—and on any products or services those states consider taxable.
- Most tax software can automate these calculations, reducing errors and ensuring accurate documentation for business tax filings and potential audits.
Maintaining Sales Tax Compliance
- Know Your Nexus: Monitor your sales to be aware of when you are approaching any changes to your nexus so you can prepare accordingly.
- Regular Remittance: To avoid any financial or legal penalties, be sure that you are remitting collected sales tax on the predefined schedule set by each state.
- Timely Taxes: Whether monthly, quarterly, or annually, ensure that you are providing accurate reporting of what you collected when filing all state sales tax returns.
- Legislation Updates: Regularly check state department of revenue websites for policy changes and updates that may impact your nexus status.
- Industry Reports: Stay updated with annual reports from trusted tax experts to understand emerging trends and compliance requirements.
- Lean on Expert Help: If all of this is sounding overwhelming, you may consider getting the help of sales tax experts so you can focus on other aspects of your business.
Common Sales Tax Scenarios and Solutions
Different business models have unique sales tax obligations. Let’s explore common challenges and practical solutions to overcome them.
Sales Tax for Ecommerce Businesses
Ecommerce businesses frequently sell across state lines, making economic nexus a key factor in their complex sales tax obligations.
- Monitor Economic Nexus: Track your sales revenue and transaction counts in each state. Most states have thresholds of $100,000 in sales or 200 transactions, but always verify the specific requirements for each state where you sell.
- Sales Tax Software: Integrate sales tax software with your e-commerce platform to automate calculations, collection, and reporting based on nexus and taxability.
- Address Validation: Use validation tools to ensure accurate sales tax calculations based on buyers' locations and jurisdictional tax rates.
- Marketplace Facilitator Laws: If you sell on platforms like Amazon or Etsy, they handle sales tax collection, but you must track obligations for other sales channels to keep accurate records.
Sales Tax for Remote Sellers
Remote sellers often establish economic or affiliate nexus through online advertising and direct mail, depending on their business activities.
- Economic Nexus: Regularly assess if you have triggered economic nexus in different states based on your sales activities and their individual thresholds.
- Affiliate Nexus: Also be aware of click-through nexus laws where affiliate marketing activities can create a sales tax obligation in some states.
- Remote Employees: Depending on their classification, remote employees may create physical nexus in their state
- State Registration: If you establish nexus in a state, promptly register for a sales tax permit with the state's revenue department or tax commission.
Sales Tax for Service-Based Businesses
While often tax-exempt, if you have a service-based business it may face tax liability challenges, especially when bundled with products (because state rules vary).
- Taxability Research: Conduct thorough research on the taxability of your specific services in every state where you operate or provide services via remote employees.
- True Object Test: If you bundle services with taxable products, understand how the true object test may determine whether the entire transaction can become taxable. Check our interactive quiz or True Object Test chart above.
- Service Location: Determine the specific location where you perform the service, as this can often impact not only state sales tax but also jurisdictional taxes.
- Exemption Certificates: Though less common, another business can claim a tax exemption on your services if they plan to resell them and provide a resale certificate.
Sales Tax for Hybrid Businesses
Hybrid businesses, combining physical, remote, eCommerce, and service models, face complex and ever-changing sales tax obligations.
- Comprehensive Nexus Assessment: Evaluate all potential nexus qualifiers, including physical (office, inventory storage), economic (remote staff, online sales), and affiliate.
- Segmented Sales Tax Tracking: Implement ways of tracking sales tax obligations separately for each aspect of your business to ensure compliance and accurate reporting.
- Multistate Strategy: Create a detailed strategy tailored to each state's specific requirements where you have or are nearing nexus.
- Consider Consulting: A sales tax professional or CPA specializing in complex sales tax requirements can help ensure accuracy and prevent costly mistakes.
Do You Need to Collect Sales Tax? We Can Help!
Many factors impact sales tax collection, but understanding nexus, taxability, and compliance is key to success. If managing sales tax feels overwhelming, The Sales Tax People can help. Schedule a free call today so we can answer initial questions and chart out the next steps to handle sales tax obligations so your business can thrive.
