Sales Tax Nexus and Obligations for Small Business Owners

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

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” (typically $100,000 in sales or 200 transactions in the state). 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.

✓Key takeaway

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
- Most common: $100,000 in sales OR 200 transactions (some states dropped the transaction test)
- 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 most states)

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
Most other states	$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 most states
You generally don’t need to register or collect separately for marketplace sales
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?

Hypothetical example

Round numbers. Three different small businesses evaluate their sales tax obligations:

Business A: E-commerce seller (physical products, ships nationwide)

Revenue: $250,000/year
Ships to 35 states
Has nexus in 12 states (exceeds $100,000 or 200 transactions in each)
Physical presence: home state only (California)

Obligations:

Register in 12 states (one-time)
Collect sales tax on orders shipped to those 12 states
File returns in each state (monthly or quarterly, varies)
Average compliance cost: $1,200-$3,000/year (software + filing fees)
Tax rates: 4-10% depending on state and locality
Customer pays the tax; the business collects and remits

If the seller fails to collect from day one:

12 states x average $8,000 in taxable sales x 7% average rate = $6,720/year in uncollected tax
The seller owes $6,720 out of pocket (cannot go back to customers)
Plus penalties (typically 10-25% of tax due)
Plus interest
After 3 years of non-compliance: $20,160 in back taxes + $4,000-$5,000 in penalties + $2,000 in interest = $26,000-$27,000

This is why e-commerce sellers must set up sales tax collection from the start. It’s not optional.

Business B: Local plumber (service business, one state)

Revenue: $150,000/year
Works only in Ohio
No out-of-state sales

Obligations:

Ohio does NOT impose sales tax on plumbing services (service is labor)
BUT: Ohio DOES tax the materials the plumber installs
The plumber should collect sales tax on the materials portion of each invoice
Example: $500 job = $200 materials (taxable) + $300 labor (exempt)
Sales tax: $200 x 7.25% = $14.50
Most plumbers either: (a) include the tax in pricing and remit, or (b) register as a “consumer” of materials and pay tax at purchase (then don’t charge the customer)
The method depends on state law and how the plumber invoices

Business C: SaaS company (software, sells nationwide)

Revenue: $500,000/year
No physical product shipped
Customers in 40+ states

Obligations (complex):

SaaS taxability varies by state:
- Taxable: Texas, New York, Pennsylvania, Connecticut, and approximately 20 other states
- Exempt: California, Colorado, Missouri, Virginia, and approximately 15 other states
- Complex/evolving: several states are adding SaaS to their tax base
Must register in each state where SaaS is taxable AND nexus exists
This could be 15-25 states (states where SaaS is taxable and revenue exceeds the threshold)
Compliance is complex: rates vary, filing frequencies vary, definitions vary

The marketplace facilitator simplification: If Business A sells 60% of products through Amazon:

Amazon collects and remits sales tax on 60% of sales (in all marketplace facilitator states)
Business A only needs to collect on the remaining 40% (direct website sales)
If direct sales are under $100,000 in most states: nexus may not exist outside the home state
The marketplace facilitator law significantly reduces compliance burden for small sellers

Sales tax automation tools:

Tool	Monthly Cost	Best For
TaxJar	$19-$99/month	E-commerce (Shopify, WooCommerce)
Avalara	$50-$250/month	Higher-volume businesses
Shopify Tax	Included	Shopify sellers
QuickBooks Sales Tax	Included with QBO Plus	QuickBooks users
Manual filing	$0 (time cost)	1-3 states, low volume

For a business with nexus in 12 states, automated filing saves 5-10 hours/month in compliance work and reduces error risk. At $50/month, the ROI is clear.

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Sales Tax Nexus and Obligations for Small Business Owners." Blue Cloud CPA, September 5, 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.