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A Business’ Guide to the United States Sales Tax

If you feel like understanding the United States sales tax laws is like trying to detangle wired headphones, don’t worry; you’re not alone.

Suppose you are a merchant selling to residents in the United States. In that case, your head might be spinning trying to understand the sales tax laws and regulations of the United States, and that is entirely understandable.

To start off, the United States does not charge a general federal sales tax as some countries do. Instead, their taxation system is run at the state level. This means that all fifty-two states implement their own tax laws and regulations, making it extremely complex for any business owner looking to expand their business into more than one state. With every state comes a different set of tax policies that the business must learn and abide by.

If you feel like understanding the United States sales tax laws is like trying to detangle wired headphones, don’t worry; you’re not alone. Luckily for you, this article will give you a baseline knowledge of the United States sales tax system, and help you understand whether your business is obligated to collect and remit sales tax.

In this Section

What is a Nexus?

Whether you register, collect, and file taxes is dependent on your nexus in the state(s) in which you conduct your business. Nexus, in simple terms, is all about presence. But determining whether you have a sufficient presence in a state is determined by which state(s) you conduct your business in, what your business sells, how much you sell, and how you sell it. 

Physical Presence Nexus

Traditionally, the United States taxes are based on a business’s physical presence in the state(s). This is known as physical presence nexus, and some questions to ask when trying to determine whether you have a physical presence nexus are:

  • Does your business maintain an office in that state?

     

  • Does it employ resident employees from that state?

  • Does your business maintain a warehouse/ shipping facility in that state? 

If you answered ‘yes’ to any of the above questions, your business has a nexus in the state(s) and will most likely have to follow the state(s) tax policy. However, since the emergence of the internet, the physical presence criteria for a business’ nexus have become outdated.

Businesses conducted online were now able to generate revenue from customers throughout the United States without paying sales taxes because they did not meet the physical nexus criteria. The lack of online tax regulations allowed digital sellers to undercut the brick-and-mortar stores and the state(s) taxation system. This has forced the state(s) to re-evaluate the tax system that is over 200 years old. 

Collecting a Sales Tax on Intangible Goods and Services

In June 2018, the absence of taxation on the digital economy came to a head in the South Dakota v. Wayfair trial. The Supreme Court ruled that online businesses were now required to collect sales tax, even if they did not meet the physical nexus criteria. Nowadays, A LOT of economic activity is moving throughout the online world, and there are constantly new ways to generate income online. For the brevity of this article, we will be focusing on the most popular intangible products and services sold online and how these are affected by United States sales tax. If you are an online business that sells any of the three below, then you might have to collect a sales tax.

Sales Tax on Digital Goods

The broad definition of digital goods, also known as digital products, is any intangible goods that exist in electronic or digital form. These goods are often delivered through email or as a downloadable. They include anything from online games, electronic tickets, e-books, and music, among many other goods. Because economic activity from digital goods is relatively new to the economy, only twenty-five out of the forty-five states has implemented a sales tax on digital goods. 

Sales Tax on Saas

A newer concept to the online world, yet one of the fastest-growing industries, software as a service (SaaS) encompasses web-based software, hosted software, or on-demand software. Unlike their cousin, digital goods, SaaS does not require downloading or cost upfront. Rather, SaaS are often considered online tools paid for through subscription services. They primarily utilize the leading cloud computing application that allows for remote access whenever, wherever, as long as there is internet. Some SaaS titans in this industry are Hubspot, G-Suite, Canva, and our corporate favourite, Slack.

If your business allows users to connect to, and use, software applications online rather than on a desktop, uses cloud-based software, utilizes hosted applications, or software on-demand, then you’re selling a SaaS product. In that case, you need to be aware of the state(s) sales tax laws in which you are conducting your business. 

Sales Tax on Online Education

Thanks to the 2020 pandemic, people worldwide have grown accustomed to consuming education online. Trading textbooks for e-books and in-person group discussions for breakout rooms, the internet became essential for all forms of education. Despite schools resuming in-person classes, online education shows no sign of slowing down. With online courses, webinars, asynchronous online learning, adaptive e-learning, and many more, it’s safe to say that education is no longer mutually exclusive with a physical desk and a classroom. But should you charge a sales tax on online education the same way you would in-person education? The answer is no.

Multiple factors determine whether your business charges a sales tax on online education or not. Some questions to ask yourself are: 

  • Is the education you are providing considered an educational service (credited) or digital service (non-credited)?

  • How is the education delivered to your students? (i.e., downloaded, pre-recorded, live)

  • Are you selling more than just education? (i.e., textbooks, consulting services, resume building)

  • Will the grading be automated or graded by an instructor?


Unfortunately, like the rest of the United States tax system, many states determine the taxation on online education differently, but the twenty-four states part of the Streamlined Sales and Use Tax Agreement (SSUTA) have mutually agreed on a sales tax policy for online education. Doing so makes collecting and remitting sales tax simple for business owners who are delivering online education to residents in these twenty-four states.

Now that you’ve determined whether your goods and/or services should collect sales tax, how much revenue does your business need to generate before collecting and remitting taxes?

What is Economic Nexus?

The economic nexus determines a business’s tax liability based on the business’ economic activity within the state(s). It’s important to note that the economic nexus is not an online sales tax or an e-commerce tax. Instead, it is a general taxation system applied to all businesses, online or offline. The triggering of the economic nexus includes, but is not limited to, the selling of physical goods, digital goods, SaaS, subscriptions, online education, or general e-commerce.

As indicated below, the sales threshold varies from state to state. You are only required to register with the state(s) that apply to your business. 

Economic Nexus Threshold on State Sales Tax Laws

  State
  Revenue Threshold  
Number of Sales Transaction Threshold 
Threshold Period 
  Alabama $250,000 or greater

N/A

Previous calendar year 

  Alaska N/A

N/A

N/A 

  Arizona $100,000 or greater

200

Previous or current calendar year 

  Arkansas $100,000 or greater

200

Previous or current calendar year 

  California $500,000 or greater

N/A

Previous or current calendar year 

  Colorado $100,000 or greater

N/A

Previous or current calendar year 

  Connecticut $250,000 or greater 

200

12-month rolling period 

  Delaware N/A

N/A

N/A

  Columbia $100,000 or greater

200

Previous or current calendar year

  Florida $100,000 or greater

N/A

Previous or current calendar year

  Georgia $100,000 or greater

200

Previous or current calendar year

  Hawaii $100,000 or greater

200

Previous or current calendar year

  Idaho $100,000 or greater

200

Previous or current calendar year

  Illinois $100,000 or greater

200

12-month rolling period

  Indiana $100,000 or greater

200

Previous or current calendar year

  Iowa $100,000 or greater

N/A

Previous or current calendar year

  Kansas $100,000 or greater

N/A

Previous or current calendar year

  Kentucky $100,000 or greater

200

Previous or current calendar year

  Louisiana $100,000 or greater

200

Previous or current calendar year

  Maine $100,000 or greater

200

Previous or current calendar year

  Maryland $100,000 or greater

200

Previous or current calendar year

  Massachusetts $100,000 or greater

N/A 

Previous or current calendar year

  Michigan $100,000 or greater

200

Previous or current calendar year

  Minnesota $100,000 or greater

200

Previous or current calendar year

  Mississippi $250,000 or greater

200

12-month rolling period 

  Missouri N/A

N/A

N/A

  Montana N/A

N/A

N/A

  Nebraska $100,000 or greater

200

Previous or current calendar year

  Nevada $100,000 or greater

200

Previous or current calendar year

  New Hampshire N/A

N/A

N/A

  New Jersey $100,000 or greater

200

Previous or current calendar year

  New Mexico

$100,000 or greater

N/A

Previous or current calendar year

  New York

$500,000 or greater

100

Previous or current calendar year

  North Carolina

$100,000 or greater

200

Previous or current calendar year

  North Dakota

$100,000 or greater

N/A

Previous or current calendar year

  Ohio

$100,000 or greater

200

Previous or current calendar year

  Oklahoma

$100,000 or greater

N/A 

Previous or current calendar year

  Oregon

N/A

N/A 

N/A

  Pennsylvania

$100,000 or greater

N/A 

12-month rolling period 

  Puerto Rico

$100,000 or greater 

200

Previous or current calendar year

  Rhode Island

$100,000 or greater 

200

Previous or current calendar year

  South Carolina

$100,000 or greater 

N/A 

Previous or current calendar year

  South Dakota

$100,000 or greater 

200

Previous or current calendar year

  Tennessee

$100,000 or greater

N/A 

12-month rolling period

  Texas

$500,000 or greater

N/A 

12-month rolling period

  Utah

$100,000 or greater

N/A 

Previous or current calendar year

  Vermont

$100,000 or greater 

200

12-month rolling period 

  Virginia

$100,000 or greater 

200

Previous or current calendar year

  Washington

$100,000 or greater

200

Previous or current calendar year

  West Virginia

$100,000 or greater

200

Previous or current calendar year

  Wisconsin

$100,000 or greater

N/A 

Previous or current calendar year

  Wyoming

$100,000 or greater

200

Previous or current calendar year

Definitions of Threshold Periods

A threshold period is a time frame that a business uses to determine its tax liability. As indicated above, not every state implements the same threshold period. The four various threshold periods practiced throughout the United States are as follows:

  • Previous or current calendar year is the most common throughout the various states. If your business does not meet the economic threshold in the previous calendar year (from January 1 to December 31), then the current calendar year is reviewed. 

  • Twelve-month rolling period includes the most recent 12 months.

  • Previous calendar year only considers the economic activity of a business from January 1 to December 31 of the previous year. 

  • Previous four tax quarters consider a business’ fiscal quarters. A period of four months makes up one fiscal quarter. 

While the reference table above will help determine whether your business triggers the state(s) economic nexus, it is not a comprehensive guide to all state’s specific rules and regulations. For example, while Alaska does not charge an economic nexus under state tax laws, some local jurisdictions within Alaska do charge an economic nexus.

Nexus Based on How You Acquire Sales

Affiliate Nexus

Affiliate nexus is determined by an out-of-state business’s relationship with an in-state individual. This includes everyone from affiliates, employees, representatives, independent contractors, marketers, and any other personnel. Suppose an individual directly refers customers and/or generates revenue for your out-of-state business. In that case, your business has an affiliate nexus within the state. There are currently thirty-three states that implement affiliate nexus. 

Click-Through Nexus

Like the affiliate nexus, the click-through nexus is based on referrals within the state for an out-of-state business. However, the significant difference between the affiliate nexus and the click-through nexus is that the click-through nexus applies to direct or indirect referrals made through a link or a website ad. If an in-state individual refers customers to a link or an ad, and you generate sales from that, then you have a click-through nexus in that state. Likewise, suppose you manage to generate an in-state sale through any link or ad, even without a physical referral. In that case, you still have a click-through nexus in that state. There are currently eighteen states that implement click-through nexus.

What to Do If Your Business Has a Nexus

  1. Use the relevant links above to register with the state(s) for a tax permit. You can also visit the Streamlined Sales and Use Tax Agreement (SSUTA), which offers a free online application system established by twenty-four states to help businesses with their taxes.

  2. Begin charging and collecting the state(s) sales tax from customers within the state(s). This is in addition to any applicable sales tax established by the jurisdiction, district, and/or county in which your business is being conducted.

  3. File and remit your sales tax to the appropriate state(s)

 

Seshhub has partnered up with Stripe as our official payment and processing system. To access all payments, balancing, and reports, please refer to your Seshhub admin dashboard. 

Seshhub offers general information to help merchants selling in Canada understand the Canadian tax system. However, it does not replace any information or regulation that has been set forth by the official government. To ensure that your taxes are collected, remitted, and registered correctly, consult your local authority or tax professional.


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