Economic Nexus and Sales Tax: When Your Business Owes Tax in States Where You Have No Office

Before 2018, a business only had to collect sales tax in states where it had a physical presence (office, warehouse, employee, or inventory). The Supreme Court’s decision in South Dakota v. Wayfair (2018) changed that permanently. Now, states can require any business that exceeds an economic nexus threshold (set by each state, such as $100,000 of sales in Florida or Pennsylvania and $500,000 in California or Texas) to collect and remit sales tax, regardless of physical presence. For e-commerce businesses, service businesses with remote clients, and SaaS companies, this means potential sales tax obligations in dozens of states. The compliance burden is real: each state has different rates, different rules about what is taxable, different filing frequencies, and different exemption certificates. Marketplace facilitator laws have shifted the collection obligation to platforms like Amazon, Etsy, and eBay for sales through their marketplaces, but direct sales (through your own website or invoices) remain the seller’s responsibility.

What does sales tax compliance actually look like?

How do I know if I need to collect sales tax?

Sales tax obligations depend on nexus, a connection between your business and a state that triggers a collection requirement. Physical nexus comes from having a location, employee, or inventory in a state. Economic nexus, established after the 2018 Supreme Court decision in South Dakota v. Wayfair, triggers when you exceed a state’s revenue or transaction threshold (each state sets its own figure and period; Florida and Pennsylvania use $100,000 of sales, for example, while California and Texas use $500,000). Each state sets its own rules, rates, and exemptions. If you sell online and ship to multiple states, you likely have economic nexus in several states and must register, collect, and remit sales tax in each.

What is the difference between sales tax and use tax?

Sales tax is collected by the seller at the point of sale and remitted to the state. Use tax is owed by the buyer when sales tax was not collected, typically on out-of-state purchases or items withdrawn from inventory for personal use. As a business, you owe use tax on equipment, supplies, or inventory purchased from vendors who did not charge sales tax. Many states combine sales and use tax on a single return. Failing to self-assess use tax can result in back-tax assessments for the full statute of limitations period, typically three to four years, plus interest and penalties.

Related guides:

• State Nexus and Multistate Taxation: When Your Business Owes Taxes in Another State

Do California, Texas and New York use a $500,000 threshold?

California, Texas and New York all set their remote seller line at $500,000, and each measures it its own way. California counts sales of tangible goods for delivery there in the preceding or current calendar year. Texas looks at total Texas revenue, taxable and nontaxable, over the preceding twelve calendar months.

New York adds a second test. You need more than $500,000 of goods delivered into the state and more than 100 sales, both in the immediately preceding four sales tax quarters. Meet one and not the other and you’re under.

In the example above, California at $250,000, Texas at $200,000 and New York at $170,000 all sit under these lines on sales alone. What can still pull the seller in is physical presence, such as inventory stored at a third-party fulfillment center in California. Pennsylvania is the contrast: at least $100,000 of gross sales in a calendar year, though a marketplace seller leaves out sales made through a facilitator that collects the tax for it.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.