Magento Sales Tax 101

Magento Sellers’ Guide to Sales Tax Nexus

by Mark Faggiano

Sales Tax Nexus Magento Merchants

When setting up sales tax in the shopping cart, Magento prompts a seller to “make sure that you are familiar with the tax requirements of your locale.”

This is easier said than done!

One of the most basic things a Magento seller needs to know when setting up sales tax collection is in which states should you even collect sales tax.

Short answer: you should collect sales tax in states where you have “sales tax nexus.” But what does that even mean?

Sales Tax Nexus 101 for Magento Sellers

Sales tax nexus is just a legalese way of referring to “a significant connection” to a state. In a state’s view, if you have sales tax nexus there then you are using state resources (like roads, etc.) and you should charge sales tax to buyers in that state and remit it back. Many states get large portion of their income from sales tax collected, so they have a vested interest in making sure that all merchants collect sales tax from buyers.

So how do you know if you have sales tax nexus? To make matters more complicated, sales tax is governed at a state level and every state has a slightly different definition of sales tax nexus. But most states consider these common factors:

  • You operate your business in the state (you’ll always have sales tax nexus in your business’s home state)
  • You have an office in the state
  • You have or store items in a warehouse in the state
  • You have an employee, contractor, salesperson or installation/repairperson in the state
  • You have a 3rd party affiliate in the state
  • You drop ship from a state
  • You sell products at a trade show or craft fair in a state

In other words, ask yourself if you have some kind of “significant connection” to a state with your Magento store. If you do, it’s worth checking with the state department of revenue in that state to see if you do or don’t have sales tax nexus.

There are sometimes exceptions, too. For instance, Washington is very lenient when it comes to establishing sales tax nexus. They only require merchants to collect sales tax when they make $12,000 from buyers in the state in a year. Most states aren’t nearly this lenient. In fact, many consider storing just one piece of inventory in a warehouse to create sales tax nexus!

As you can see, you might start out with nexus in just your home state. But as your business grows in complexity and you start to hire, drop ship or sell at trade shows your sales tax compliance may become more complicated.

I have sales tax nexus. Now what?

You should set up your Magento store to collect sales tax in your home state. (Unless you’re lucky and live in a state with no sales tax!)

You should also register for a sales tax permit with your state’s taxing authority (often called “‘Your State’ Department of Revenue”) before you begin collecting. Many states even consider it unlawful to collect sales tax in their name without a permit, so don’t forget this step.

If this post has led you to discover that you have sales tax nexus in more than one state, you should also register for a sales tax permit in those additional states, and set up your Magento store to collect sales tax from buyers in those states. Fortunately, this is easy with the TaxJar’s Sales Tax Automation Magento extension.

Here’s a quick video on installing the Sales Tax Automation Magento extension from TaxJar, and a step-by-step guide to handling sales tax in multiple states within Magento with TaxJar. It only takes a few minutes!

Related Links

TaxJar’s Sales Tax 101 Guide for Magento Sellers

Have questions about sales tax nexus as a Magento seller or about TaxJar’s Sales Tax Automation extension? Start the conversation in the comments!

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