When do I have to collect sales tax in another state?
Sales tax collection is required in a state once you have nexus there, which now includes economic nexus. After a landmark Supreme Court decision, a state can require collection when your sales into it cross a set dollar or transaction threshold, even without physical presence. Physical presence, such as inventory or staff, also creates nexus. Once triggered, you must register before collecting.
Key points
- Sales tax nexus exists through physical presence, such as an office, employees, or inventory, or through economic nexus based on sales volume alone.
- Since South Dakota v. Wayfair in 2018, a state can require collection once a seller's sales into it cross the state's dollar or transaction threshold.
- A seller must register for a sales tax permit in a state before collecting tax there, because collecting without a permit is itself a violation.
- Inventory stored in a third-party fulfillment warehouse creates physical nexus in that state, even when the seller never chose the location.
- Marketplace facilitator laws shift collection to the platform for marketplace sales, but direct website sales still count toward a seller's thresholds.
What creates sales tax nexus in a state?
Nexus is the connection between a seller and a state strong enough for the state to require the seller to collect its tax. Physical presence is the traditional trigger: an office, a warehouse, employees, sales representatives, or inventory located in the state. Inventory held in a third-party fulfillment center counts, which is how marketplace sellers acquire nexus in states they never selected.
Economic nexus is the second trigger. After South Dakota v. Wayfair in 2018, every state with a sales tax adopted a threshold, measured in sales dollars or number of transactions into the state over a current or prior calendar year. Cross it and the state can require collection with no property or people there. Thresholds, measurement periods, and what counts toward them differ by state.
What happens once the threshold is crossed?
The sequence matters. The seller registers with the state's revenue department for a sales tax permit, then begins charging the correct rate, which in most states varies by city or county. Collected tax is held for the state, reported on returns filed monthly, quarterly, or annually depending on volume, and remitted on the state's schedule.
Because the tax belongs to the customer and passes through the seller, failing to collect it means the seller pays it from its own margin, plus interest and penalties. The duty begins when nexus is established, not when the seller notices, so a threshold crossed during a strong quarter can quietly start the clock.
Do marketplace facilitator laws remove the obligation?
Partly. Nearly every state now requires a marketplace, meaning a platform that lists products and processes payments for third-party sellers, to collect and remit sales tax on sales made through it. A seller whose sales all run through such a marketplace may have little direct collection duty for those transactions.
Sales through the seller's own website, wholesale channels, or other platforms still require direct collection, and in many states marketplace sales still count toward the economic nexus threshold that triggers registration for the seller's direct sales. Some states also require registered sellers to file returns even when the marketplace collected everything.
What are the limits, and how is past exposure cleaned up?
A seller below every state's threshold, with no property, people, or inventory outside its home state, collects only at home. Sales of services and digital products are taxed in some states and not others, so the product mix changes which thresholds matter. Exempt sales, such as sales for resale, generally require a valid exemption certificate on file to be excluded.
When a threshold was crossed in an earlier period, most states offer voluntary disclosure, which limits the lookback and reduces penalties in exchange for registering and paying. Sales tax compliance software can track thresholds, but the decision of where and when to register, and whether to file a disclosure, is typically made with a CPA who works in state and local tax.
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People also ask
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Sources
Related guides: retail wholesale, manufacturing
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
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