Physical nexus is when your business has a tangible presence in a state - such as a storefront, office, warehouse, employees or contractors, inventory, trade show attendance, etc. Within the state. 

Economic nexus is established when your business reaches specific sales thresholds or transaction counts in a state. The most common thresholds are $100,000 or 200 transactions within a calendar year. However, many states are getting rid of transactions counts as a barometer for economic nexus.

Sales tax obligations are not only determined by office location. You can also create physical nexus through employees living in a state, contractors or representatives visiting a state to perform services or make sales, warehouses or inventory sitting in a 3rd party warehouse, and more.

And as of 2018, physical nexus is no longer the only way to create sales tax nexus. The Wayfair decision in 2018 created economic nexus as an additional way a business could create an obligation to collect sales & use tax. This means that if a business’s sales revenue and/or number of sales transactions exceeds a certain threshold over a one-year period of time, then the state will assert sales tax nexus and require the business to collect the applicable sales tax. Of the 45 states that impose a sales tax, all now have economic nexus laws (plus AK locals and DC).

Check out the latest information in our economic nexus guide.

No, while many states use $100,000 in sales or 200 transactions as a threshold, others vary. Some states have eliminated the transaction count altogether, and some states have higher thresholds (California is $500,000). Always check the specific rules for each state you sell into.

Check out the latest information in our economic nexus guide. 

Identifying your nexus footprint should not be a one and done project. Many businesses need to look at this on a yearly, quarterly or even monthly basis. You can establish nexus in a new state or jurisdiction through hiring new employees, attending tradeshows and having sales growth in new areas. It is important to set aside time to re-examine your nexus footprint, so you ensure you remain compliant.

Eventually, yes. Once nexus is established, states usually require that the registered company collect and remit the sales tax for at least 1 year. Most of these decisions have been informally developed and are not found in statute. Requiring a company to collect sales tax and file returns after nexus is terminated is recognition by the states that the market development activities created in the states when nexus existed has a residual effect that will last for some period of time.

However, it can be somewhat difficult to cancel a registration with a state. In most cases, once nexus is established and a business is established in a particular state, there is a greater chance that business will expand in that state and not decrease. 

Yes. Most states include gross sales, regardless of taxability, when determining whether you’ve crossed a nexus threshold – even if you’re selling exclusively to resellers or tax-exempt entities.

Yes. Even a single employee working from home in a different state can create physical nexus and a tax obligation in that state.

Most states impose both a "sales" and a "use" tax. A "sales tax" typically refers to the tax charged to the customer by an in-state retailer at the time of a taxable transaction. Sales tax can be a "privilege tax" or an "excise tax." As a privilege tax, it’s imposed on retailers for doing business in the state; if not charged, the retailer is usually the only one held liable. As an excise tax, it’s imposed on the property being sold; if not charged, states can pursue either the purchaser or the retailer for the unpaid tax. In both cases, the retailer may collect the tax from the customer to cover their liability.

"Use tax" complements sales tax and is due when a taxable purchase occurs but sales tax wasn’t charged, commonly for out-of-state purchases. It can be paid by the purchaser or collected by the vendor. Typically, sales and use tax rates are the same, though in some states, use tax may exclude certain local taxes. However, the use tax rate can never exceed the sales tax rate. 

The situs is the location in which a taxing event occurs. It’s easy to determine when the entire transaction occurs at the point-of-sale but is more difficult when the transaction involves numerous sites.

In direct retail, for instance, situs can influence sales tax obligations depending on where the tangible personal property is shipped from in origin states or where it’s shipped to in destination states (learn more about the difference here). Of course for products purchased and taken possession of at a physical storefront, the situs is the location of the store itself.

Situsing can be complex in certain industries though, like SaaS and leasing, you can learn more here. 

Vendors are required to assume that all sales are taxable until the customer provides a valid exemption certificate. The only way to have the vendor stop charging tax is to provide them a valid exemption certificate for the state in which the items are shipped to

In most cases, exemption certificates do not expire. Other states, (i.e. Florida) requires that exemption certificates be updated annually. In addition to retaining the new certificate, you should also retain the certificate that is being replaced. If you have the space, you may want to keep certificates to cover 10 years worth of sales transactions. In most cases, this period is beyond the period that most states would audit. In some cases, the use of an exemption certificate software or services may be a cost beneficial alternative to managing the certificates manually. 

Sales tax software can help with rate calculation and filing, but full compliance involves a highly complex set of rules and regulations. These rules change frequently in many jurisdictions, and the question of whether (and how) your company needs to collect and remit sales tax to a certain jurisdiction can be quite difficult to determine with manual oversight. For complex businesses, relying solely on automation can lead to errors and liability.

You register once you’ve determined that your business has established economic or physical nexus in a state. And you’ll deal with the state’s Department of Revenue.

This varies state to state but they typically ask for: 

• Your reason for applying and how long you’ve done business in the state;
• Contact information for your business, including the legal name, the federal employer ID number (EIN), the business address, phone number and email address, in addition to other details;
• Your type of business and possibly its North American Industry Classification System (NAICS) number;
• Your bank information;
• The owners’ information (most states also have personal responsibility laws concerning sales tax obligations).
  

International remote sellers may also need to apply for a U.S. Foreign Employer Identification Number (FEIN), which allows the IRS to keep track of and oversee businesses that have obligations within the United States. 

Rules vary widely from state to state for the physical delivery of goods. Many states say that when the contents of a shipment are taxable, so is the shipping cost; similarly, when items in a shipment are exempt from sales tax, so is the cost of shipping. But as with most things in sales tax, this isn’t always the case, it depends on the situation and jurisdiction. 

Missing a deadline can result in penalties and interest, even if you owe no tax (i.e., a zero return). In some states, repeated non-filing can lead to your account being closed or additional scrutiny from auditors. 

Currently, sales tax across the U.S. has many deadlines, often every month – but not on the same day for every business or state. Returns (with remittance of sales tax you collected) are typically due monthly, quarterly or annually and usually set when you register, but may change periodically. Some states have more unusual frequencies, including semi-annual and bimonthly. Learn more here.

In most states, the performance of personal and professional services is not taxable. If the service you perform includes data processing, information analysis, communications, or the interstate movement of data, you may be performing a service that is taxable in a number of states.

If your service involves the construction of real property or the installation of property, there are a variety of issues you must concern yourself with. Contractors owe tax on all the items of material they purchase. They are generally not permitted to purchase materials for resale. As with all rules, there are some very limited exceptions to this rule.

Providers of non-taxable services have the obligation to pay tax on all the property they purchase to perform the service. 

Companies that sell and install software and provide other computer-related services have a variety of issues they should be concerned with. First, many have nexus in many states and do not realize the significance of this connection.

Further, almost all states tax computer software licenses when the software is delivered in a tangible fashion. In addition, more states are taxing software when it is downloaded electronically and even Software-as-a-Service. Also, a few states now tax custom software and many of the consulting services that are used to implement the software when sold.

Check out our SaaS Taxablility Map. 

Yes. The confusion lies with the sometimes controversial Internet Tax Freedom Act (ITFA), passed in 1998. ITFA does prohibit federal, state and local governments from taxing internet access and from imposing discriminatory internet-only taxes. There were a few states that were “grandfathered” and were allowed to charge tax on internet access; these grandfathered rules have been revoked as of July 1, 2020. 
 
ITFA has no application to the taxability of telecommunications services. Understanding that VoIP is not tax-free, each state (and in some situations, each local jurisdiction) is able to decide whether VoIP is taxable or not. For example, California at the state level does not tax VoIP, but various cities in California apply a local utility users tax to VoIP. Learn more. 

Yes and no. As a telecom service provider, you are using infrastructure within a state to deliver your service. This infrastructure includes cell towers, fiber, switches and so on. You may not own this infrastructure, but if it were not present, you could not deliver your service. States have concluded that the use of this infrastructure creates attributional nexus and therefore gives you the responsibility to collect the applicable taxes. Wherever you have customers, you must collect the taxes. Learn more. 

Traditionally, telecom services were simple to identify and consists solely of voice services. POTS was the primary, if not sole telecom service historically. POTS stands for Plain Old Telephone Service and is essentially an analog voice transmission implemented over copper wire. However, new services have emerged over the last 25+ years including a dramatic shift to VoIP service. Additional telecom-related services have emerged including broadband access, private line service, data-only services, satellite communications, wireless, etc. Within the last ten years, there has been further integration between software and telecom services often blurring the boundary of what the service actually represents. One example is video conferencing services which have become more mainstream, especially due to the pandemic and has added to the complexity. Each of these services can have a different tax and regulatory treatment from state to state. 

One of the principle tenants of multistate sales tax is that all sales of tangible personal property are presumed to be taxable unless a specific exemption or exclusion from the sales tax exists in law. To further compound the issue, even though exemptions may exist, the burden to claim the exemption rests with the customer.

A sales tax "exemption" is a provision of law that specifically states that an otherwise taxable transaction is "not taxable" if certain conditions are met and if the vendor receives the appropriate exemption certificate from the purchaser. The most common exemption is the "resale" exemption that allows items of resale inventory to be purchased without tax. Without providing the vendor with a valid resale exemption certificate, though, the vendor is obligated to charge the customer sales tax.

Exemptions can exist at both the product level and the entity level. The resale exemption is an example of a "product" exemption. "Entity level" exemptions may include sales to the federal government, certain charitable organizations, and state government agencies.

A sales tax "exclusion" is a transaction that has never been subject to tax. For example, many states exclude Software-as-a-Service from taxation. In most states, sales of services are excluded from tax unless specifically listed as taxable in the law.

Most states do not require that certificates be exchanged by the parties when a transaction that is "excluded" by law is entered into. In most cases, these transactions are generally recognized as being non-taxable by operation of law and do not require an affirmative claim by the purchaser.

If a transaction is not excluded by law, it is deemed to be taxable. As a taxable transaction, the only way a purchaser can obtain relief from either the sales or use tax that will be due is to provide the retailer with a valid exemption certificate that is specific to that transaction. In most cases, absent a valid exemption certificate, sales tax will be charged by vendors even though they may know the item is not taxable. Because the tax burden is on the retailer if they fail to collect the tax, their only obligation is to collect that tax or collect the exemption certificate.

This is a very common question and it also reflects an attitude that has cost businesses millions of dollars in taxes over the years. As stated earlier, all sales of property are deemed to be taxable unless valid exemption certificates have been received. If a resale certificate is issued to the seller and the purchaser uses the materials in ways that are inconsistent with the resale certificate, then only the purchaser has a liability for the use tax due when the inventory was converted to a taxable use.

If no exemption certificate is issued to the seller, and an audit is conducted on the seller, the sale will be deemed to be taxable until a valid resale certificate has been received. In most states, it is permissible for retailers to obtain certificates for historical sales. Other states, though, only allow certificates to be valid from the date of issue forward. If a retailer fails to obtain a resale certificate and the customer to whom the property was sold is unable or unwilling to provide a resale certificate to the retailer after the sale, the retailer can (and will) be assessed sales or use tax on the transaction. In addition to the tax, interest and penalties will likely be assessed.

Assessments like this happen with great regularity. Many wholesalers have been assessed tax on transactions that everyone agreed were "resale" transactions, but since the wholesaler could not get a resale certificate from their customer, they were assessed the tax, interest, and penalties as if the transaction had not been for resale. This problem occurs most when customers go out of business after the sale or stop using the supplier. As mentioned earlier, the presumption of state sales tax is that every sale is taxable until a valid exemption certificate is issued.

Even if you only sell property in "resale" transactions, you should still implement a strict policy of obtaining and retaining resale exemption certificates from your customers. Collecting exemption certificates is vital for limiting liability even if you do not file returns in the state where the sale is made.

All sales of tangible personal property are presumed taxable unless a specific exemption or exclusion applies. Even if an exemption exists, the burden to claim it is on the purchaser, typically by providing a valid exemption certificate.

Exemptions can apply at the product or entity level (e.g., resale inventory, government purchases), while exclusions refer to transactions never subject to tax (e.g., SaaS in some states). Exclusions generally don’t require certificates, but exemptions do.

If a transaction is not excluded by law, it is taxable unless the purchaser provides a valid exemption certificate. Without one, vendors are obligated to collect tax, even if they believe the item is not taxable, because the liability ultimately falls on them. 

All sales are presumed taxable unless a valid exemption certificate, such as a resale certificate, is provided. If a certificate is not obtained, and the seller is audited, the transaction may be deemed taxable, resulting in assessments for tax, interest, and penalties.

In most states, it is permissible for retailers to obtain certificates for historical sales. Other states, though, only allow certificates to be valid from the date of issue forward. If a customer doesn’t provide a certificate after the sale, the retailer can (and will) be assessed sales or use tax on the transaction. In addition to the tax, interest and penalties will likely be assessed.

Even if you only sell property in "resale" transactions, you should still implement a strict policy of obtaining and retaining resale exemption certificates from your customers. Collecting exemption certificates is vital for limiting liability even if you do not file returns in the state where the sale is made. 

No. Exemption certificates are state-specific. You must collect the correct form for each state where your customer claims exemption.

First, determine whether nexus existed in the state where the sale took place and if the transaction was taxable. If both apply, contact major customers to determine if they paid use tax on those transactions. In most interstate transactions, the purchaser and the retailer have an equal responsibility for the payment of tax on the transaction.

If customers have not accrued the tax, you may consider billing them for the tax that was not charged. This strategy is almost never used for taxes more than a few months delinquent since the loss of a customer could be far more damaging to the business.

Under audit, non-registered businesses can be assessed tax for many years of the past due taxes. A few states limit the look-back to seven years, but other states will go back much further. In addition to the tax, states will impose interest which averages 12% a year and penalties which can be 25% of the tax due. however, many states offer voluntary disclosure programs (VDAs), which limit the look-back period to three or four years and usually have a provision to abate the penalty. 

Most states have statutes that hold corporate officers or other "responsible parties" personally liable for the sales or use tax that was not collected. In some cases, states impose severe criminal penalties for officers who collect tax but do not remit the tax collected.

This liability attaches to the officer and the liability can be enforced through the lien, levy, and sale of property to satisfy the debt. 

Acquiring the assets of stock (equity) of a company that may have a liability for past due taxes creates "successor liability". So, the acquiring company takes on the same risk and liability that the target company had. Acquiring the assets of an entity does not prevent this liability from attaching unless specific statutory procedures are followed. In many states, notices of bulk sales must be filed before a business can be sold. Further, purchasers may be required to withhold certain amounts of the purchase price until an audit has been done of the target company.

Provisions in purchase contracts that attempt to limit the liability of the purchaser for unpaid tax are ineffective and not binding on the state. Any time a business is acquired, careful diligence should be conducted to identify and quantify the sales and use tax risks of the company. 

If you don’t have nexus in a state, then the state has no jurisdiction over your business and has no ability to compel you to pay any type of tax.

If your business had/has nexus with the other state, then that state can enforce the tax liability against you. This can include assessments against your business, the levy of any property in the destination state, filing collection suits in court, using collection agents to collect the debt, or using the courts. If your business is ever contacted by another state, be responsive and pay attention to all the dates and deadlines in the notices. 

A voluntary disclosure agreement (VDA) is a legal means for taxpayers to self-report back taxes owed for income, sales, property, and other taxes.

In exchange for voluntarily reporting the tax due, states generally grant a waiver of penalty and a limited look back (generally 3-4 years) potentially reducing the tax due significantly compared to an audit. The limited look back period of 3-4 years allows a business to eliminate the risk associated with the older periods. Otherwise, the state can assess tax due, penalties and interest from the time from which taxable sales first occurred.

If you had previously collected sales tax but failed to remit, you must pay all that has been collected (even beyond the look back period) but the penalty would still be waived. And in extreme cases, the penalty could be more than 50% of the tax amount… and could be considered a criminal offense.

Here are three common situations in which a VDA is most beneficial: 

• If you have previous non-compliance and exposure dated back more than 4 years 
• When you’ve collected sales tax but have yet to register and remit to the prospective state 
• If you are looking to sell your business or otherwise seek outside capital and have previously not complied
  

Sales tax risk might be considered immaterial, but when you consider up to 10% of a business’s overall revenue could be exposed, compounded over a period of multiple years, including penalties and interest for non-compliance; sales tax risk can be quite significant. It has even been known to tank a merger or acquisition.  

There are two main qualifications for your business to be accepted into a VDA program. You cannot have already registered in the state and you cannot have already been contacted by the state for an audit or for questions about your sales/use tax exposure. 

A state cannot find and audit every business that is not in compliance. States would prefer for businesses to voluntarily comply. A VDA allows the state to welcome in new taxpayers and get cash up-front for the previous 36-48 months of non-compliance. That taxpayer is now registered to continue collecting/remitting prospectively. The waiver of penalty and the limited look back is fair and equitable for both parties in a VDA.

A marketplace facilitator is a business or organization that contracts with third party businesses to sell goods and services on its platform and facilitates retail sales. Marketplace facilitators enable these sales by listing the products, taking the payments, collecting receipts, and in some cases assisting in shipment. Well-known examples include Amazon, eBay, and Etsy.

Marketplace facilitator laws mean that your facilitator will handle collecting and remitting sales taxes on behalf of your sales in states where your marketplace has nexus. In most situations, if you are only selling through a marketplace facilitator, they will manage sales tax for you in the states with these laws. Simple right? Well not so much if you are selling on your own as well.

In the majority of states, if you don’t do any sales outside of those with the facilitator, you may not need to collect or file any sales tax. But there are instances in which you may be required to file a “zero return” or register for non-reporting sales tax status.

Selling through one of these sites may ease your sales tax obligations, but not if you already sell on your own website or through other sales channels. Your sales via a marketplace facilitator will contribute to the economic nexus threshold in most states. As a result, these sales can create a sales tax nexus and thus require you to collect sales tax on sales not associated with a marketplace. 

Marketplace facilitator laws grew from the idea that a state could collect all of the required sales tax from one entity rather than from thousands of smaller companies. Ironically, such uniformity is the last thing you’ll encounter in tax regulations as you sell nationwide.

The majority of states with economic nexus laws, also employ marketplace facilitator laws but it is best to consult with a sales tax expert or CPA to find the most updated laws. 

If you are also selling products or services off of your own site as well as through a marketplace facilitator you may have nexus in more states than you realize. You may need to consider the total sales through both the marketplace facilitator and your own site, to determine if you have crossed any economic nexus thresholds. If you have crossed the economic nexus thresholds, then you will establish sales tax nexus and will need to collect and remit sales tax on your own sales.

In many states, if you don’t make any sales outside of those with the facilitator, you may not need to collect or file any sales tax. But there are instances in which you may be required to file a “zero return” or register for non-reporting sales tax status. 
 
Marketplace facilitator laws may relieve some marketplace sellers from certain sales tax collection obligations, but as a marketplace seller you can have a physical presence and an obligation to collect and remit sales or use tax in states where your inventory is stored for sale. 

Remember, a facilitator will only handle the sales tax on transactions sold through its platform. If Amazon is collecting sales tax on your behalf in Washington but you’re in Washington and you sell items through your business website too, you still need to collect, remit and file in the state on your own. And in many states, if you don’t do any sales outside of those with the facilitator, you may not need to collect or file any sales tax. But there are instances in which you may be required to file a “zero return” or register for non-reporting sales tax status.

Don’t forget about warehouses (Amazon, to name one facilitator, famously has many throughout the country). Marketplace facilitator laws may relieve some marketplace sellers from certain sales tax collection obligations, but as a marketplace seller you can have a physical presence and an obligation to collect and remit sales or use tax in states where your inventory is stored for sale.

Most sales tax calculation software is delivered in the cloud via a Software-as-a-Service model. These tools automate the sales tax calculation process by integrating with the invoicing or ERP system typically via an API (Application Programming Interface). When it comes time to create a customer quote or invoice, the ERP system will pass certain data elements (customer location, product, sales amount, etc.) to the sales tax calculation system which will then calculate the sales tax and pass back to the ERP system the applicable sales tax. 

States with the highest base statewide sales tax (7%) are Indiana, Mississippi, Rhode Island and Tennessee. Given combined statewide and local sales tax rates, though:

Highest (11.5% - 10.4%): Arkansas, Oklahoma, Louisiana, Arizona, Colorado, Alabama, Illinois, Kansas, Washington. (Louisiana just raised its sales tax more.)

Lowest (4.5% - 6.25%): Hawaii, Maine, Wisconsin, Kentucky, Maryland, Michigan, Washington, D.C., Wyoming, Massachusetts.

But you can’t depend on highs and lows staying consistent in sales tax.

Tax rate depends on location, product or service type, and the buyer’s jurisdiction. Many states levy both state and local rates (and sometimes special district taxes). Accurate software takes into account city, county, and special district taxes. 

There are two key factors necessary to calculate the applicable sales tax – (1) Tax rates; and (2) Taxability rules. (There are other aspects to consider including situs and exemptions, but rates and rules are the cornerstone.) In some situations, these rates and rules can be managed perfectly fine on your own without the need for sales tax calculation software. For example, if you’re selling tangible personal property (generally taxable) in just a few jurisdictions where the tax rates are easily accessible, sales tax calculation software is not necessary.

But, if you are selling tangible personal property into multiple states and local jurisdictions, you may need a bit more information. For this, you can subscribe to a tax rate service that allows you to lookup current sales tax rates, upload the tax rates into your invoicing/ERP system and your invoicing/ERP system will calculate the tax.

However, if you are selling something like telecommunications or SaaS services on a nationwide basis, or even things that are usually considered TPP but have different taxability rules across some states or jurisdictions, sales tax calculation software is much more important.