Sales Tax Nexus Mid-Year Check: Have You Crossed a Threshold Without Realizing It?

A sales tax nexus mid-year check is a review of your company’s sales and physical presence in each state to confirm whether you have triggered an obligation to collect and remit sales tax there. If your company sells its products or services in more than one state, a mid-year review can help you catch a sales tax nexus obligation before it becomes a costly compliance problem. Most states set an economic nexus threshold of $100,000 in sales (and some add a transaction count), but the rules, measurement periods, and the types of sales that count vary widely from state to state.

Sales tax nexus occurs when your business has a presence in a state that triggers an obligation to pay sales tax there. Traditionally, that presence was a physical one, such as having a warehouse or employees in the state. Today, many states require businesses to collect and pay sales tax based on economic activity — with or without a physical presence.

So, if you sell online to customers in different states and your sales exceed the economic nexus thresholds imposed by those states based on annual sales revenue or another measure, you would be obligated to collect and pay sales tax in every state where nexus was established. You may also need to register for a sales and use tax permit in each of those states before you begin collecting.

As you’ll find out as you keep reading, rules regarding nexus vary from state to state, and thresholds can be reached gradually as your sales increase. A mid-year check can help you identify tax obligations before they become compliance issues, which could result in penalties, interest charges, back taxes, and other liabilities.

What Is Sales Tax Nexus?

Sales tax nexus is the connection between your business and a state that is significant enough to require you to collect and remit that state’s sales tax. There are two main types. Physical nexus is created by a tangible presence such as an office, employees, or inventory stored in the state. Economic nexus is created by reaching a certain level of sales revenue or transaction volume in the state, even with no physical footprint there. Following the 2018 South Dakota v. Wayfair Supreme Court decision, nearly every state with a sales tax now enforces economic nexus rules.

What to Watch For

What’s tricky about sales tax nexus is that annual sales thresholds vary by state, along with the measurement periods for those thresholds and the type of sales that count toward the threshold.

Most states use $100,000 as a threshold for sales tax nexus. But some states also consider transaction volume, or a combination of sales and transaction volume, when establishing thresholds for sales tax nexus.

And, while many states base their thresholds on gross sales, others count only retail sales, taxable sales, or certain services or digital products.

In addition to understanding how a particular state establishes a threshold, you’ll need to know how the threshold is measured. Some states rely on the calendar year, while others use a rolling 12-month period for lookback. Some measure based on the previous calendar year or use another method.

An Example of Sales Tax Nexus in Action

Victoria’s Vintage Jewelry conducts online sales in numerous states, including Pennsylvania and California.

The company’s annual sales in Pennsylvania were $150,000, while those in California totaled $250,000.

Because Pennsylvania has a $100,000 gross sales threshold for economic nexus and California’s threshold is $500,000, Victoria’s Vintage Jewelry is required to collect and pay sales tax in Pennsylvania, but not in California — despite having sold more jewelry there.

Also, Pennsylvania’s nexus threshold is based on gross sales during a rolling 12-month period, while California’s threshold is measured on a calendar-year basis. As you can see, the criteria pertaining to sales tax nexus varies dramatically between those two states.

When assessing its potential for sales tax nexus in New York, Victoria’s Vintage Jewelry must consider both the state’s transaction-count requirement and its sales dollar threshold. Businesses that sell in New York must exceed $500,000 in gross sales and conduct more than 100 sales transactions during the preceding four tax quarters before establishing economic nexus and triggering the sales tax requirement.

In Arkansas, however, the company will only be required to collect and pay sales tax if it has more than $100,000 in sales or more than 200 separate transactions there.

These widely ranging nexus requirements can be confusing and make it relatively easy to trigger nexus if your company experiences increased sales in a particular state or conducts more transactions than normal. Varying systems among states for measuring sales and thresholds, and different standards concerning the types of sales that count toward nexus thresholds, further complicate the situation.

Keeping Track of Sales Tax Nexus

Keeping track of nexus generally requires monitoring sales activity in every state where your company has customers. Ideally, you should do this monthly or quarterly to stay updated on your status and get alerted when you’re getting close to a state’s sales tax threshold. If you reach the threshold, you’ll need to register with the state for a sales tax permit, collect sales tax from customers in that state, and file sales tax returns.

While looking at sales activity, don’t forget to also consider any potential physical nexus thresholds, such as employee presence, office space, or an inventory storage area. A physical presence in a state can trigger a sales tax obligation even if amounts generated by sales or the number of transactions are below the threshold. If you expand into a new state, you may also need to file a foreign qualification to legally do business there.

Accounting software, e-commerce platforms, and sales tax automation tools can help you monitor sales by state, generate sales reports, manage inventory, calculate sales tax, and complete other tasks.

Consider this checklist for tracking potential sales tax nexus for your company:

• Review sales by state on a regular basis, preferably monthly
• Compare your company’s sales and transaction counts against the thresholds for each state
• Note the measurement period used by each state to determine nexus thresholds
• Track all physical presence within each state to determine if sales tax nexus exists
• Document any in-state business activity, such as participation in trade shows or conferences
• Review each state’s nexus rules at least annually, as they can be subject to change
• Act promptly to register and begin collecting sales tax when you cross a nexus threshold

Note: Five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — do not impose a statewide sales tax, meaning that sales tax nexus rules generally do not apply. There may be other state and local tax rules, however, so be sure to check on any regulations that might apply to your business.

What You Need to Know

Waiting until the end of the year to monitor sales tax nexus thresholds is risky, as expansion into new markets or a surge in sales in a particular state can create new obligations that are easy to miss.

And, because standards vary so much from state to state, special attention should be given to the rules for each state in which your company has sales. The Sales Tax Institute and each state’s department of revenue publish current thresholds, which can change from year to year.

Technology can help, but if you’re uncertain about what can contribute to reaching sales tax nexus thresholds or how to monitor your sales and physical presence in a particular state, consider seeking help from a professional.

Frequently Asked Questions