If you sell stuff online on websites like Etsy, eBay or Amazon, no doubt you’ve wondered when you’re supposed to collect sales tax. Customers ask us all the time if they should be charging everyone sales tax or just customers in their state.
The key to knowing when to collect sales tax from your customers can be boiled down to one word: nexus.
Nexus is a fancy word for “a presence in a state significant enough that you need to collect sales tax in that state.” In other words, if you have a nexus in a state then you are supposed to collect sales tax from customers in that state.
Let’s go through a few of the most common examples to help you better understand when you need to collect sales tax:
Where you live and/or operate your business is nexus
This is probably the simplest example. Let’s say you live in Dallas and you sell stuff on eBay from your home. That’s considered home-state nexus. The state of Texas wants you to collect sales tax from customers in Texas.
Where you have a warehouse is nexus
Let’s say you live in Dallas but business is going so well that you have a warehouse in California so you can ship to your West Coast customers a little faster. That warehouse is a nexus. California wants you to collect sales tax from customers you sell to in California.
Where you make sales creates nexus (sometimes)
Many states have “economic nexus” laws. Economic nexus occurs when a business meets a certain threshold of economic activity in a state. This threshold varies by state, but is commonly $100,000 in sales in a state or 200 transactions. When a business meets this threshold, states can now require online sellers to collect the state’s sales tax from in-state buyers.
Currently about half the states with sales tax have economic nexus laws. You can read each state’s economic nexus laws here.
This is a relatively new form of sales tax nexus, and came about due to the Supreme Court ruling in favor of South Dakota in the South Dakota v. Wayfair case. You can read more about the case and what that means for sales tax nexus here.
Amazon FBA creates nexus
Let’s take the previous example further. Let’s say you sell stuff online using Amazon’s FBA program to fulfill your orders. By sending your inventory to Amazon you’re essentially adding potential nexus to a whole bunch of states. If you’re in Dallas and sell to someone in Ohio and Amazon ships to that person from one of it’s Ohio facilities then you are supposed to collect sales tax from that customer. I talk about sales tax rates in another blog post.
Keep in mind that in this great country of ours every state does have it’s own set of sales tax rules, so the above examples are a general set of guidelines. Check out this page for more about sales tax in a specific state.
So From Which Customers Do You Collect Sales Tax?
Long story short, if you have sales tax nexus in a state, then collect sales tax from all customers in that state, no matter what platform you sell on.
If you have any other questions, start the conversation in the comment section below.