E-commerce has revolutionized shopping, making it a breeze to access countless options. But for e-commerce sellers, this convenience comes with a crucial responsibility: mastering economic nexus. Ever wonder why it’s so important for online sellers to stay vigilant about this? 

In this post we’re going to unravel the complexities of economic nexus and why you need to stay on top of it in your e-commerce business.

What is economic nexus?

In the simplest terms, economic nexus is a tax obligation that is triggered when an e-commerce seller’s business activities reach a certain threshold in a state, regardless of physical presence. Crossing the economic nexus thresholds means it’s time to start collecting and remitting sales tax in that state. 

In the past, retailers and online sellers primarily had to collect state and local sales taxes in states where they had a “physical nexus”—an office, warehouse, or a remote employee working there. That made sales tax compliance relatively simple.

However, the Supreme Court ruling in South Dakota vs. Wayfair shook things up for companies that make online sales.

That case expanded the definition of sales tax nexus beyond simply having a physical presence in the state, and many states passed economic nexus legislation. Now, business owners must collect sales taxes if they have economic nexus. This could include sales revenue, transaction volume, or a combination of both within a specific time frame. 

To complicate matters, each jurisdiction has its own set of criteria. For example, according to Avalara’s State-by-State Guide to Economic Nexus, in New York State, economic nexus is triggered when you have $500,000 of sales AND 100 transactions. However, across the border in Massachusetts, you reach economic nexus when you hit $100,000 in sales.

Some states require you to file sales taxes if you met the threshold in the previous calendar year, but some require you to collect taxes as soon as you establish nexus in the current year.

All kinds of e-commerce or remote sales can trigger economic nexus, including catalog, online, and telephone orders. 

To be clear, physical nexus rules still apply. So you still have to collect sales tax in any state where you have an office, a warehouse, a remote employee, an affiliate, or temporarily do business. However, layering economic nexus rules complicates sales tax compliance for even the smallest e-commerce sellers. 

What happens when you cross the economic nexus threshold?

Once you meet a state’s threshold, it’s time to register for a sales tax permit and start collecting taxes from customers in that state. Missing out on this can lead to penalties, back taxes, and interest, which can take a toll on your profits.

Staying on top of economic nexus not only ensures compliance but also aids in reputation management and financial clarity.

The dangers of not monitoring economic nexus

The consequences of ignoring economic nexus in your e-commerce business can be severe:

• Hefty Fines and Penalties. Failing to comply with economic nexus laws can result in substantial fines and penalties, which can be a serious financial hit for your business.
• Risk of Sales Tax Audits. Not keeping track of economic nexus increases the likelihood of being audited. Sales tax audits are not only stressful but can also be costly in terms of time and resources.
• Legal Complications. In some cases, non-compliance can escalate to legal actions, leading to a more complex and potentially damaging situation for your business.
• Damaged Reputation. Compliance issues can harm your business’s reputation, affecting customer trust and potentially leading to a loss of sales.
• Financial Uncertainty. Without proper monitoring, you could end up with unexpected tax liabilities, disrupting your financial planning and stability.

Software solutions: your compliance allies

According to the Tax Foundation, over 11,000 sales tax jurisdictions exist in the U.S. But don’t worry—you don’t have to read up on the tax rules in every one of them.

Keeping an eye on sales tax nexus doesn’t mean you need to be a tax law whiz. Thanks to handy software solutions build for e-commerce businesses like TaxJar and Avalara, tracking your sales and pinpointing your economic nexus is a breeze. These tools connect to your e-commerce platforms and ensure you have real-time data at your fingertips to easily stay compliant.

Need an expert hand with sales tax compliance?

Navigating the sales tax maze is a must-do for every e-commerce business out there. Staying sharp on economic nexus isn’t just a good idea—it’s absolutely essential if you sell online. With cool tools like TaxJar or Avalara, you can tackle economic nexus like a pro.

Feeling a bit lost about where your economic nexus stands in your e-commerce business? Or scratching your head over the best sales tax tool for your biz? Give us a shout. We’re here to walk you through every step so you can keep doing what you’re great at – growing your online business. Remember though – staying on top of your sales tax compliance isn’t only about avoid issues, it’s also about building a business that stands the test of time.