Navigating Tax Nexus: Selling to US Customers Across States
For ecommerce businesses, the United States represents an enormous market opportunity with its high consumer spending power and digital adoption. However, selling to US customers comes with a complex web of tax obligations that vary dramatically from state to state. Understanding tax nexus—the connection between your business and a state that triggers tax obligations—is crucial for avoiding penalties and ensuring compliance.
Whether you're a small Shopify store or an established international brand, navigating the maze of US state tax requirements can feel overwhelming. But with the right knowledge and tools, you can confidently expand your business across state lines while staying compliant.
Key Takeaways
Understanding Tax Nexus: The Basics
Tax nexus is the legal connection between your business and a state that gives the state authority to require you to collect and remit sales tax. Traditionally, nexus was established primarily through physical presence—having employees, inventory, or property in a state. However, following the landmark 2018 Supreme Court decision in South Dakota v. Wayfair, states can now impose tax collection requirements based on economic activity alone.
"The Wayfair decision fundamentally changed the landscape for interstate commerce by allowing states to require remote sellers to collect sales tax based on economic nexus rather than physical presence." -
This means that even if your business has no physical footprint in a state, you may still be required to collect sales tax if you meet certain economic thresholds in that state.
Types of Nexus That Affect Ecommerce Sellers
Physical Nexus
Physical nexus is established when your business has a tangible presence in a state, such as:
Many ecommerce sellers are surprised to learn that using fulfillment services like Amazon FBA can create physical nexus in states where their inventory is stored, even if they never set foot in those states.
Economic Nexus
Economic nexus is triggered when your business reaches certain thresholds of economic activity in a state, typically measured by:
These thresholds vary significantly by state. For example:
The challenge for sellers is keeping track of these varying thresholds across all states where they have customers.
Marketplace Facilitator Nexus
Many states have enacted marketplace facilitator laws that require platforms like Amazon, eBay, and Etsy to collect and remit sales tax on behalf of sellers using their platforms. While this simplifies tax compliance for sales made through these channels, sellers still need to manage tax obligations for direct sales through their own websites.
State-by-State Compliance: Focus Areas
California: A Case Study in Complexity
California exemplifies the complexity of state tax systems. As the world's fifth-largest economy, it represents a significant market opportunity but comes with stringent tax requirements.
For remote sellers, California established an economic nexus threshold of $500,000 in sales to California customers in the preceding or current calendar year. Additionally, California has district taxes that can vary by location, creating a patchwork of tax rates within the state.
According to the California Department of Tax and Fee Administration, businesses meeting the threshold must register, collect, and remit sales tax—even if they have no physical presence in the state.
High-Population States to Watch
States with large populations typically have more aggressive tax enforcement and represent greater risk exposure for non-compliant sellers:
Practical Steps for Managing Tax Compliance
1. Determine Where You Have Nexus
Start by conducting a nexus study to identify all states where you may have tax obligations:
2. Register for Sales Tax Permits
Once you've identified states where you have nexus:
3. Implement Tax Collection Systems
Accurate tax collection requires:
4. Leverage Automated Tax Solutions
Manual tax management across multiple states is virtually impossible without specialized software. Tax automation tools can:
According to Avalara's State Sales Tax Guide, "Tax automation software can reduce the risk of errors and penalties while freeing up time to focus on growing your business."
Common Pitfalls and How to Avoid Them
Misunderstanding Marketplace Facilitator Laws
Pitfall: Assuming marketplace facilitator laws cover all your tax obligations.
Solution: Understand that while platforms may collect tax on marketplace sales, you're still responsible for direct sales and for registering in states where you have nexus.
Ignoring Local Taxes
Pitfall: Focusing only on state-level taxes while overlooking local jurisdictions.
Solution: Ensure your tax calculations include county, city, and special district taxes, which can add several percentage points to the base state rate.
Failing to Keep Records
Pitfall: Not maintaining adequate documentation of your tax compliance efforts.
: Store all tax-related records for at least the statute of limitations period (typically 3-7 years) including:
- Registration documents
- Filed returns
- Exemption certificates
- Transaction records
International Sellers: Special Considerations
If you're selling internationally to US customers, additional complexities arise:
The Shopify International Selling Guide recommends consulting with tax professionals who specialize in cross-border commerce to ensure full compliance with both US and home country regulations.
Conclusion: Turning Tax Compliance into a Competitive Advantage
Navigating tax nexus across US states may seem daunting, but approaching it strategically can actually become a competitive advantage. Businesses that master tax compliance can:
Rather than viewing tax compliance as merely a regulatory burden, consider it an essential component of your business infrastructure—one that supports sustainable growth and customer trust in an increasingly complex marketplace.
By staying informed about changing requirements and leveraging technology to automate compliance, you can focus on what matters most: growing your business and serving your customers.