When do you charge sales tax on items sold out of state?

If you operate an online business, either in addition to or in lieu of a brick-and-mortar store, there’s a good chance you have out-of-state customers. Do you charge sales tax on items shipped out of state? Should you?

The answer, as is often the case with sales tax, is it depends.

• Your sales tax obligations are based on nexus.
• Sales tax nexus can be established through economic activity, physical presence, referrals, and affiliates in a state.
• If you fail to collect and remit sales tax as required, you could have to pay the tax yourself, plus penalties and interest.

Whether you need to charge sales tax on items shipped out of state depends on nexus, a connection between you, the seller, and the taxing jurisdiction. If you have nexus with a state, you typically need to obtain a sales tax permit, charge sales tax, file sales tax returns, and remit sales tax as required by the laws of that state.

This isn’t something to take lightly. If you have nexus and don’t collect and remit sales tax as required, you can be liable for the uncollected tax, plus applicable penalties and interest charges. In such instances, the retailer usually ends up paying the sales tax out of pocket; it’s hard to collect sales tax from customers after a sales transaction is complete, and the perils of doing so may offset potential gains. Just imagine how a belated request for sales tax would trend on review and social media sites.

Nexus determines whether a business owes sales tax on products and services sold to out-of-state customers. A business located in Pennsylvania that sells online to customers in Texas is required to collect and remit Texas sales tax if the business has nexus with Texas — but not if it doesn’t have nexus with Texas. 

If a seller doesn’t have nexus and doesn’t collect sales tax at the point of sale, the buyer would owe the state the corresponding use tax. Here’s what you need to know about use tax vs. sales tax.

There are several ways for a business to establish nexus with a state:

• Economic activity in the state (economic nexus)
• Physical presence in the state (physical presence nexus)
• Referrals from in-state individuals or businesses (click-through nexus)
• Ties to affiliates in the state (affiliate nexus)

One of the most challenging aspects of sales tax nexus is that nexus laws vary by state. While all states with a general sales tax enforce economic nexus and physical presence nexus, no two economic nexus or physical presence nexus laws are exactly alike. And even if affiliate nexus and click-through nexus laws are a bit less common than economic and physical nexus, they’re no less complicated or varied.

Physical presence nexus laws can be more complex than you might think. In some states, like Washington, “physical presence is a nexus standard that requires only more than the slightest presence.” 

Nexus-creating activities may include having an employee in the state or holding marketplace inventory in the state. Exhibiting at a trade show can also create a physical presence for sales tax.

Inventory is one of the stickiest wickets for physical presence nexus, as many Fulfillment by Amazon (FBA) sellers have discovered. More than 20 states have specified that inventory in a state creates sales tax nexus even when the products are stored in a warehouse owned or operated by a marketplace facilitator or another third party — and even if the seller has little to no control over the movement of their inventory.

Sales tax nexus laws related to trade shows and remote employees can be equally complex and stringent.  

The consequences of overlooking physical nexus can be significant. States can reach far back to recoup unpaid sales tax revenue when a business has a physical presence in a state. If the state tax authorities discover you have a presence in the state and you haven’t been compliant, they can hold you liable for unpaid sales tax back to when you first established nexus.

If physical presence is a “gotcha” for many businesses, economic nexus is giving it a run for its money.

The Supreme Court of the United States overturned the physical presence rule for sales tax with its decision in South Dakota v. Wayfair, Inc. (June 21, 2018). The Wayfair ruling didn’t eliminate physical presence nexus; it enabled states to require a business with no physical presence in a state (a remote seller) to collect and remit sales tax. 

There are now economic nexus laws in effect in all states that have a general sales tax, plus Puerto Rico, Washington, D.C., and parts of Alaska (which has local sales taxes but no state sales tax). There are also local economic nexus requirements in a handful of states that allow home rule — a quagmire for another blog post.

Every state’s economic nexus law is unique, but all economic nexus laws have a threshold: Businesses that meet a state’s economic nexus threshold must register for sales tax and comply with all applicable laws; businesses whose sales are beneath a state’s nexus threshold aren’t required to register unless they’ve established sales tax nexus with the state in another way.

Unfortunately, for businesses that sell nationwide, the thresholds for economic nexus vary from state to state.

State economic nexus thresholds

There are six different thresholds for sales tax economic nexus: 

• $100,000 in sales 
• $100,000 in sales or 200 separate transactions 
• $100,000 in sales and 200 separate transactions
• $250,000 in sales 
• $500,000 in sales 
• $500,000 in sales and 100 transactions

However, every economic nexus threshold includes different types of sales.

What sales are included in the economic nexus threshold?

Some states include services in their sales tax thresholds, while others include only tangible goods. Some states count digital products and services toward the economic nexus threshold; others don’t. And some states include exempt transactions, while others include only taxable retail sales.

See our state-by-state guide to economic nexus laws for state-specific details.

Click-through nexus laws had their heyday in the years leading up to the Wayfair decision, when ecommerce was growing like gangbusters and the physical presence rule was still in effect. Under click-through nexus, out-of-state businesses must register for sales tax if they 1) receive referrals from residents of the state, and 2) make a certain amount of sales from such referrals.

Several states repealed their click-through nexus laws after the Wayfair ruling, but they remain in effect in about 15 states. For state-specific details, see our state-by-state guide to click-through nexus.

Affiliate nexus laws impose a sales tax obligation on out-of-state businesses that have ties to affiliates in the state. The affiliates must somehow promote the remote retailer’s business, by selling a similar line of products under a similar name, for example, or by distributing advertising materials on behalf of the out-of-state business.

Several states have repealed their affiliate nexus laws, but affiliate nexus is still on the books in approximately 25 states. As with physical presence nexus, economic nexus, and click-through nexus, affiliate nexus requirements for each state vary. 

For state-specific details, check out our state-by-state guide to affiliate nexus laws.

Businesses must collect and remit sales tax in states where they have nexus. Sales tax nexus can be established through physical presence, economic activity, referrals originating in the state, and ties to in-state affiliates. Specific requirements differ from state to state.

If you make more than a few interstate sales, determining when and where you need to charge sales tax on your out-of-state sales can become a full-time job. Don’t just take my word for it. “Today, even a small online seller could have a customer in every state,” wrote the Government Accountability Office (GAO) in 2022. “With every sale, a seller has to determine whether nexus, physical or economic, has been met, and potentially collect and remit tax.”

Complying with sales tax laws is absolutely essential in states where you have sales tax nexus.

So, what now? 

If you’re not sure if or where you may have economic nexus, our free sales tax risk assessment may be a good place to start. If you’re pretty sure you have nexus in one or more states where you’re not registered for sales tax, you may want to consider a nexus study and/or consulting with a trusted tax advisor.

When it comes time to register for sales tax, calculate and collect sales tax, and file sales tax returns in multiple states, Avalara’s suite of tax automation products and services can help. Learn about automating sales tax compliance at avalara.com.

When did economic nexus laws take effect?

It varies, depending on the state. Economic nexus took effect in New York on June 21, 2018, the day of the Wayfair ruling. Missouri became the last state to enforce economic nexus on January 1, 2023.

How long is the measurement period for economic nexus? 

It varies. For example: 

• Alabama uses the previous calendar year.
• Colorado and Iowa use the current or previous calendar year. 
• New York uses the immediately preceding four sales tax quarters.

Have sales tax thresholds changed?

Economic nexus thresholds can and do change. For instance, numerous states, including Alaska and Wyoming, have eliminated the 200-transaction threshold. 

When a threshold changes, you need to know exactly when the change took effect and when it’s OK for you to deregister if you no longer have nexus under the new threshold.

Check out our state-by-state guide to economic nexus laws for state-specific sales tax threshold details.

This blog post has been updated; it originally published March 15, 2016.