Sales Tax Nexus and Obligations for Small Business Owners
Sales tax is a state and local tax, not a federal tax, and the rules vary dramatically by state. After the Supreme Court’s South Dakota v. Wayfair decision (2018), states can require businesses to collect and remit sales tax even without physical presence in the state, based on “economic nexus” (set by each state, such as $100,000 of sales in Florida or Pennsylvania and $500,000 in California or Texas). For small businesses that sell products online, this means potentially having sales tax obligations in dozens of states. For service businesses (which make up the majority of small businesses), the picture is different: most states exempt services from sales tax, though some tax specific categories of services. Understanding when sales tax applies and when nexus exists is critical because failing to collect and remit sales tax creates a liability that the business must pay out of pocket, often with penalties and interest.
Sales tax basics:
Who collects:
- Businesses that sell taxable goods or services to end consumers
- The business collects from the customer and remits to the state
- The business is a pass-through (the tax is on the customer, collected by the business)
- If the business fails to collect: the business owes the tax out of pocket
What’s taxable (varies by state):
- Generally taxable: tangible personal property (physical goods), certain digital products
- Generally exempt: most services, groceries (in many states), prescription drugs, medical devices
- Varies: software, SaaS, digital downloads, cleaning services, repair services
- 5 states with no sales tax: Alaska (local only), Delaware, Montana, New Hampshire, Oregon
Nexus (when you have an obligation):
- Physical nexus: office, warehouse, employee, inventory, or property in the state
- Economic nexus (post-Wayfair): exceeding a sales threshold in the state
- Many states use $100,000 in sales; some also count 200 transactions (Ohio), and several dropped that test (South Dakota, Illinois)
- Measured over the prior 12 months or current calendar year (varies by state)
- Affiliate nexus: related entities with physical presence in the state
- Click-through nexus: referral agreements with in-state websites (varies)
- Marketplace facilitator nexus: selling through Amazon, Etsy, eBay (the marketplace collects on your behalf in states whose facilitator laws cover it)
Common thresholds (2025):
| State | Threshold |
|---|---|
| California | $500,000 in sales |
| Texas | $500,000 in sales |
| New York | $500,000 AND 100 transactions |
| Florida | $100,000 in sales |
| Pennsylvania, South Dakota | $100,000 in sales |
Service businesses and sales tax: Most service businesses DO NOT collect sales tax. But exceptions exist:
- Taxable in many states: cleaning services, landscaping, pest control, repair services
- Taxable in some states: consulting, IT services, personal services
- Generally exempt everywhere: medical services, educational services, financial services
- The rule is state-specific. Check your state.
Marketplace facilitator laws: If you sell through Amazon, Etsy, eBay, Walmart Marketplace, or other platforms:
- The marketplace collects and remits sales tax on your behalf in states with marketplace facilitator laws (including California, Florida, New York, Pennsylvania and Texas)
- You generally don’t collect separately on marketplace sales, but California and New York still count them toward your own threshold
- Direct sales (your own website) are your responsibility
- Track marketplace vs. direct sales separately
Sales tax compliance:
- Register with each state where you have nexus
- Collect the correct rate (state + county + city + special district)
- File returns on the required schedule (monthly, quarterly, or annually)
- Remit collected tax by the due date
- Use software (TaxJar, Avalara, Shopify Tax) to automate rate calculation and filing
How does sales tax affect different small businesses?
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 Sales Tax for Small Businesses: Complete Guide
- Sales Tax Nexus for Small Businesses: When You Must Collect and Remit
- Small Business Sales Tax: Nexus Rules, Collection Obligations, and Common Mis…
Which sales count when you test a state’s threshold?
It depends on the state, and the difference can move you over or under the line. Florida counts only taxable remote sales in the previous calendar year, against more than $100,000. Pennsylvania counts gross sales, taxable and nontaxable, and uses at least $100,000 in a calendar year, though a marketplace seller leaves out sales made through a facilitator that collects for it.
Texas counts taxable and nontaxable sales into Texas, including sales for resale and to exempt buyers, over the preceding twelve calendar months, with a $500,000 safe harbor. California counts all sales of tangible goods for delivery there, including related persons’ sales and your marketplace sales, over the preceding or current calendar year against $500,000.
Business A in the example, with $250,000 of total revenue, can’t top $100,000 in 12 states. In at least ten of those states, nexus would have to come from something other than a $100,000 sales test, such as a transaction count like Ohio’s 200, or physical presence.
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Yarik Yarosh, CPA. "Sales Tax Nexus and Obligations for Small Business Owners." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-sales-tax-nexus-obligations
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.