Economic Nexus and Small Sellers—What Need to Know

In the fast-paced world of ecommerce, small sellers often face challenges when it comes to tax compliance. One of the most critical and complex issues they encounter is economic nexus. If you're a small ecommerce seller in the US, it's crucial to understand what economic nexus is and how it affects your business. In this comprehensive guide, we'll dive into the concept of economic nexus, its implications, and what you need to know to ensure compliance and successful operations.

What is Economic Nexus?

Economic nexus is a legal concept that emerged with the growth of online sales. Traditionally, businesses were only required to collect sales tax in states where they had a physical presence, such as a brick-and-mortar store or warehouse. However, with the rise of ecommerce, states sought ways to collect sales tax from online transactions.



Economic nexus refers to the threshold a business must meet to trigger tax obligations in a specific state, even without a physical presence there. The threshold is typically based on the seller's revenue or number of transactions within that state over a defined period.

How Does Economic Nexus Affect Small Ecommerce Sellers?

For small ecommerce sellers, understanding economic nexus is vital because it determines where they must collect and remit sales tax. Once a seller surpasses the economic nexus threshold in a particular state, they become liable for collecting and remitting sales tax on sales to customers within that state.



For example, if a small seller based in Arizona reaches the economic nexus threshold in Texas, they will be required to register for a sales tax permit in Texas, collect sales tax from Texas customers, and remit those taxes to the state's tax authority.

Economic Nexus Thresholds

Each state sets its economic nexus thresholds, and they vary from state to state. Thresholds can be based on either sales revenue or the number of transactions within the state. For instance, a state might require sellers to collect sales tax if they have over $100,000 in sales or 200 transactions within a year.



Since thresholds are subject to change, small ecommerce sellers must stay up-to-date with each state's regulations to ensure compliance.

Example Scenario:

Let's say you run an online store selling collectables. You're based in Ohio and make sales to customers all over the country. As your business grows, you notice a significant increase in sales to customers in California, Texas, and New York.



Upon analyzing the economic nexus thresholds in those states, you realize that you've exceeded the requirements in California and Texas, but not in New York. This means you'll need to collect and remit sales tax for customers in California and Texas, but not for customers in New York until your sales in that state cross the threshold.

The Supreme Court case of South Dakota v. Wayfair, Inc. in 2018 had a profound impact on economic nexus regulations. The Court ruled that physical presence is no longer the sole determining factor for sales tax collection. States now have the authority to enforce economic nexus laws, provided they meet certain criteria.



Following the Wayfair decision, many states updated their economic nexus laws, which significantly expanded the number of businesses required to collect and remit sales tax.

Multi-State Sales Tax Compliance

For small ecommerce sellers operating nationwide, keeping track of the ever-changing economic nexus rules in multiple states can be daunting. Here are some steps to help you navigate multi-state sales tax compliance:

1. Research Economic Nexus Thresholds
Familiarize yourself with the economic nexus thresholds in each state where you have customers. Regularly check for updates as these thresholds may change over time.

2. Automate Sales Tax Calculation
Invest in sales tax automation software that can accurately calculate the correct tax rate for each transaction based on the customer's location. This will streamline the process and minimize errors.

3. Register for Sales Tax Permits
Once you've surpassed the economic nexus threshold in a state, register for a sales tax permit with the respective state's tax authority. This allows you to collect and remit sales tax legally.

4. Keep Detailed Records

Maintain meticulous records of your sales transactions, as well as the taxes collected and remitted for each state. This information will be invaluable during tax audits.

5. Seek Professional Help
Consider consulting with a tax professional or advisor who specializes in ecommerce and sales tax. They can provide personalized guidance tailored to your business's needs.

For small ecommerce sellers in the US, understanding economic nexus is crucial for maintaining compliance with sales tax regulations. As states continue to adapt to the evolving landscape of online commerce, sellers must stay informed and proactive in meeting their tax obligations. By researching economic nexus thresholds, automating tax calculations, and seeking professional assistance when needed, small ecommerce sellers can navigate the complexities of economic nexus and focus on growing their businesses while ensuring legal compliance. Remember, staying informed is the key to success in the ever-changing world of ecommerce.

Salim Omar

Salim is a straight-talking CPA with 30+ years of entrepreneurial and accounting experience. His professional background includes experience as a former Chief Financial Officer and, for the last twenty-five years, as a serial 7-Figure entrepreneur.