Operating in multiple states can make it challenging for businesses to keep up with varying rules and regulations. If your business sells or operates across state lines, understanding your sales tax obligations is essential.
As states increasingly and aggressively enforce sales tax compliance, it’s critical to understand when sales tax filings are required. Staying informed helps avoid audits, penalties, and unnecessary costs.
What Is Economic Nexus and When Is It Established?
Economic nexus is the connection a business has with a state. In the past, many states established economic nexus once a business reached either 200 transactions or a specified dollar amount of sales within the state. However, in recent years, many states are doing away with the individual transaction requirement. States that have eliminated this requirement include Illinois and Indiana. Kentucky is also set to eliminate this effective August 1, 2026. There are still however a number of states such as Ohio, Michigan, and Georgia that continue to impose the 200-transaction requirement. As a rule of thumb, the most common threshold is $100,000 in gross sales during the current or prior calendar year. Some states such as California, Texas, and New York have a higher bar set at $500,000.
How Else Can Nexus Be Established?
Nexus can also be established if your business has employees, offices, warehouses, or even inventory within a state, no matter your sales volume. It is crucial to monitor out-of-state volume quarterly, or at a minimum semi-annually.
When you make sales that are exempt from tax, for example, sales for resale, or sales to exempt organizations, you should obtain and retain a valid exemption or resale certificate from the buyer to protect yourself in the case of an audit. These certificates should generally be kept for 3-7 years. Without valid documentation, you could be held liable for uncollected sales tax, even if the sale was legally exempt.
What You Need to Do
Once nexus has been established, you are required to collect the appropriate amount of sales tax and file a sales tax return within that state. Sales tax is generally based on the location where the product is delivered, used, or consumed by or, in the case of services, where the service is performed.
Because sales tax rules and rates can differ widely between jurisdictions, identifying the proper taxing authority is key to ensuring accurate collection and compliance with state and local requirements.
What Happens if You Did Not Collect Sales Tax at the Time of Sale?
Businesses are responsible for self-assessing and remitting use tax to the appropriate state. This occurs when taxable goods or services are used, stored, or consumed within that state and the seller did not charge sales tax at the time of purchase.
This obligation exists even when the seller is located out of state or is not registered to collect sales tax. Properly tracking these transactions and reporting use tax is essential to remaining compliant.
If you have not collected sales tax for multiple periods in a row, the time to act is now. Once a state initiates contact with you first, your options quickly become limited. Penalties and interest can grow quickly, and if no returns were ever filed, there is generally no statute of limitations, meaning the state can assess tax going back as far as records exist.
We can approach the state through a Voluntary Disclosure Agreement (VDA), which allows you to come forward on a controlled basis. This typically limits the lookback period, rather than leaving you exposed indefinitely, and usually results in a waiver of penalties. In some cases, states may offer additional relief.
Due to the overall complexity of this topic, if you need assistance, please reach out to your tax professional at HD Growth Partners. We will work with you to develop a clear plan and provide the support you need to help you stay compliant and minimize audit exposure.