US Economic Nexus Guide

Does your business have customers in the United States? Okay, listen up. Economic nexus laws demand the attention of every business, especially online sellers, SaaS companies, and any other kind of e-Commerce.

Sure, US sales tax is a tricky web, but you don’t need to get caught in it! We’re here to help you understand what economic nexus means, how it works, and which states use it with our up-to-date US Economic Nexus Guide. To see all of the economic nexus thresholds, scroll down to our table below for our detailed tax guides state by state.

Note: This guide is for online businesses selling to customers in the US. You’ll learn how to know when you’re liable for sales tax by checking registration thresholds, what the threshold levels are in each state, and how to comply with sales tax rules once you’re registered. That includes how to charge sales tax and file your returns! Plus you’ll learn how Quaderno can help you automate all of this.

What does “nexus” mean?

The term “nexus” refers to a commercial connection in the state. A nexus is something you have. So, your business either has nexus in a state, or it doesn’t have nexus in a state. When you do have nexus, that means you’re obligated to collect tax on your sales there. Each state has their own variety of sales tax nexus.

Traditionally, nexus have been determined by “sufficient physical presence,” and there are multiple ways your business could satisfy the requirement of “sufficient physical presence.” It could be through a brick-and-mortar office, a single sales representative, a high-grossing affiliate business, or even using cookies on computers located in the area.

Nowadays there are several different kinds of nexus, including some that are not based on physical presence. As we said up top, this guide focuses solely on the economic nexus.

Want to learn more about the various types of nexus and how they underpin the US sales tax system? Check out our Quick Guide to US Sales Tax Nexus.

What is economic nexus?

An economic nexus is a sales tax nexus determined by economic activity, i.e. - the amount of sales you make in a particular state. Any kind of economic activity could trigger the nexus, once your total sales reach a certain amount.

You can acquire an economic nexus regardless of where your business, employees, or warehouses are located. If your sales in that state are substantial enough, then you are liable for sales tax there. End of discussion.

But what’s substantial enough? Generally, states with economic nexus have a threshold in place. The common annual thresholds are $100,000 in sales or 200 separate sales transactions, whichever your business reaches first. However, exact numbers can vary by state. For example, California’s economic nexus threshold is measured by one number: $500,000. So if your sales in the state hit that amount, then you know you likely have economic nexus in California.

If you’re curious about some states in particular, check out state-by-state economic nexus table below!

For some background information on the development of these economic nexus policies, read our blog post on the US Supreme Court decision of Wayfair vs. South Dakota.

Watch our explainer video here:

Which US states have economic nexus?

Which US states DO NOT have sales tax?

You'll notice that there are five states missing from the table above. That wasn't an error on our end. There are five states in the US, commonly known as the NOMAD states, that do not have US sales tax. The US NOMAD states are:

• New Hampshire
• Oregon
• Montana
• Alaska
• Delaware

While none of the NOMAD states impose a comprehensive statewide sales tax, specific transactions within each state may be subject to taxation. In some instances, these states apply local sales taxes, while in others, they enforce a state tax on the purchase of particular goods or services.

What should businesses do if they meet the sales tax nexus threshold?

When businesses reach the economic nexus point in a local area (or jurisdiction), they need to sign up to collect taxes on the state’s tax or revenue agency website. It's important not to collect taxes until registration with the relevant jurisdiction is done! Registration requirements vary by state. For example, in Texas, out-of-state businesses must register by the first day of the fourth month after hitting the economic nexus point. In Rhode Island, businesses have until January 1 of the next year after hitting the economic nexus point to register, collect, and start paying sales tax.

The rules also change depending on what you're selling—physical goods, digital items, or software services. Digital items like e-books, online courses, music files, and website memberships can be tricky. Not every state taxes digital goods, and those that do have their own definitions for what counts as a digital product.

Other regulations are nuanced, too. While SaaS products are classified as digital products, they often have special rules or rates, because they're not necessarily downloaded. For example, Connecticut taxes SaaS products at full price, while Texas only taxes 80% of the price. And California doesn’t tax SaaS at all!

How to comply with sales tax rules and regulations

Here’s a quick rundown of what to do when you confirm you have nexus in a state:

1. Register for a sales tax permit in that state.

You must register for each state’s tax scheme individually. Here’s how to register for a sales tax permit. You can use our tax registration guides by state, or you could visit the state’s Department of Revenue website. Another option is to register for the 24 streamlined states all at once, using a simple (and free!) online application through the Streamlined Sales Tax Registration System (SSTRS).

2. Charge sales tax to customers in that state.

The US has over 11,000 tax jurisdictions, which means there are even more potential tax rates you need to apply to your sales. It’s a combination of several factors. Usually, the tax rate is based on where the customer is located, a destination-based tax. Only a few states have origin-based taxes, meaning you charge tax according to wherever your business is based. The tax rate often depends on what exactly you’re selling. Plus, the tax rate sometimes contains several layers of tax jurisdictions: the overall state tax, plus any local taxes applied by the county, district taxes, or city.

3. File sales tax returns in that state.

When you register, you will have been assigned a filing frequency in that state, usually quarterly but potentially monthly or annually. It’s based on your estimated sales volume, so small businesses might file just once a year while bigger companies might file every month. Learn how to prepare a sales tax return and check out these guides for filing tax returns by state.

If you sell in a state where you do not collect taxes, you should double check the local policies there to know when you might be liable for registration. Better safe than sorry!

To see how US sales tax varies from state to state, try out our free sales tax calculator.

How to automate this process

Quaderno simplifies and automates the tax compliance process so you can have peace of mind. And guess what? This isn’t limited to sales in the US! The app automatically calculates and collects sales tax, VAT, and GST on both physical and digital products and services around the world.

Here are ways that Quaderno can help automate this process:

1. Automatically track your sales vs. economic nexus thresholds

Quaderno offers automatic sales tracking in real time, no matter where you’re selling, and measures those totals against each jurisdiction’s threshold rules. Plus Quaderno visualizes the data for you. Check it out: [insert image]

2. Alert you when it’s time to register for sales tax

Thanks to Quaderno’s turnover reports and real-time data tracking, the system will alert you when your sales have hit 100% of the threshold– letting you know it might be go-time for tax compliance!). You’ll receive these notifications both in the app and via email. Who doesn’t love a heads up about important info? Especially when it can save you time, money, and stress.

3. Automatically collect taxes

Quaderno automatically calculates the correct tax on every sale, no matter which channels and payment processors you’re using. The system logs your customer’s location and the type of product, then – thanks to a massive, up-to-date tax database – applies the appropriate tax rate at checkout. Quaderno offers integrations with all of the most popular platforms and can also be added to your website’s checkout process.

4. Simplify filing and paying taxes

With Quaderno’s instant tax reports, you can file a return in mere minutes. The app tracks how much tax you’ve actually collected in each jurisdiction, and displays all the necessary information in one place. This makes filing tax returns a matter of data entry. Or, if you'd rather leave paperwork to the professionals, we'll connect you with a verified tax filing service!

Life’s too short, and your business too important, to waste valuable time and resources on taxes! Let Quaderno help you out.