Sales Tax Nexus

Sales Tax Nexus: When You Need to Collect

A side hustler sells handmade goods on Etsy. Customers in 35 states purchase her products. She never thought about sales tax—her products were below any threshold she was vaguely aware of, and Etsy took care of it anyway. Or so she thought.

The sales tax landscape for e-commerce and side businesses fundamentally changed in 2018. The Supreme Court's decision in South Dakota v. Wayfair, Inc. eliminated the requirement that a seller must have physical presence in a state before that state can require sales tax collection. Now economic nexus—a certain volume of sales into a state—is sufficient to create an obligation to collect and remit that state's sales tax.

For side hustlers who sell physical goods online, sales tax compliance is no longer a problem that goes away by not thinking about it. But it is also a problem that is less severe than many fear, particularly for those selling through major marketplaces.

WHAT NEXUS MEANS AND HOW IT'S TRIGGERED

Sales tax nexus is the sufficient connection between a seller and a state that creates a legal obligation to collect and remit that state's sales tax on sales made to customers in that state.

Physical nexus: Traditional form. Having an office, warehouse, employee, or inventory stored in a state creates physical nexus in that state. You almost certainly have physical nexus in your home state.

Economic nexus: The post-Wayfair addition. Selling a threshold amount into a state—typically $100,000 in gross sales or 200 transactions per year, though thresholds vary by state—creates economic nexus even without physical presence.

Most states now have economic nexus laws with thresholds that track South Dakota's original model of $100,000 or 200 transactions. Some states have lower thresholds; some higher. A side hustle selling primarily in its home state with modest out-of-state sales may not trigger economic nexus elsewhere and faces only the home state obligation.

YOUR HOME STATE: WHERE YOU ALWAYS HAVE NEXUS

Regardless of sales volume, you have nexus in the state where you operate your business and reside. Your home state requires sales tax registration and collection from the first taxable sale.

What's taxable varies by state. Most states tax the sale of tangible personal property—physical goods. Services are taxable in some states but exempt in others. Digital products (software, ebooks, digital downloads) have inconsistent taxability across states—some tax them as tangible personal property equivalents; others exempt them; others have specific digital product rules.

Food, clothing, prescription medications, and certain other categories are often exempt from sales tax. If you sell handmade food items, clothing, or other potentially exempt categories, verify your state's specific rules before assuming taxability.

THE MARKETPLACE FACILITATOR RULE: WHY ETSY AND AMAZON HANDLE THIS FOR YOU

The most significant simplification for small e-commerce side hustles is the marketplace facilitator rule, now enacted by virtually every state with a sales tax. Under this rule, large online marketplaces—Etsy, Amazon, eBay, Walmart Marketplace, Mercari—are legally required to collect and remit sales tax on behalf of their third-party sellers.

When you sell through Etsy, Etsy collects the applicable sales tax from the buyer and remits it to the state. You never receive the sales tax funds; they pass through Etsy to the state. Your obligation on Etsy sales: none, for states where Etsy operates as a marketplace facilitator.

This rule applies in all 45 states with sales tax. It covers all sales processed through the marketplace—including sales that would otherwise not meet your economic nexus threshold.

The practical implication for most small-scale Etsy, Amazon, or eBay sellers: sales tax is completely handled by the platform. The seller has no collection or remittance obligation for those sales, and those sales may not count toward your economic nexus thresholds in some states.

WHEN THE MARKETPLACE FACILITATOR RULE DOESN'T HELP YOU

Your own website: If you sell through your own Shopify, WooCommerce, or Squarespace store, you are not a marketplace—you are a direct seller. No marketplace facilitator is collecting on your behalf. You are responsible for sales tax compliance for any state where you have nexus.

Multi-channel selling: If you sell through both Etsy (handled by marketplace facilitator) and your own website, the two channels are distinct for nexus purposes. You may have no obligation for Etsy sales but have obligations for website sales in states where you've exceeded the threshold.

Very high volume sellers: Some states count marketplace sales toward economic nexus thresholds even though the marketplace handles collection. High-volume sellers should verify their state-by-state threshold status regardless of the platform.

THE REGISTRATION AND COLLECTION PROCESS

If you've determined you have nexus in states beyond your home state and you're selling through channels that aren't marketplace facilitated, the compliance process involves:

Step 1: Register for a sales tax permit in each nexus state. This is done through each state's department of revenue website. There is typically a small registration fee or no fee. Registration is required before you begin collecting—collecting without a permit is itself a compliance violation.

Step 2: Configure your sales channel to collect the correct tax rate. Shopify, WooCommerce, and most e-commerce platforms have built-in or integrable tax rate libraries. The configuration once done applies automatically to subsequent sales.

Step 3: File sales tax returns and remit collected taxes. Filing frequency—monthly, quarterly, or annually—is assigned by the state based on your sales volume in that state. Low-volume sellers typically file quarterly or annually; high-volume sellers file monthly.

Step 4: Maintain records of sales and tax collected. Most states require records for three to five years.

SALES TAX AUTOMATION SOFTWARE

For sellers with multi-state nexus who handle their own website sales, manual compliance across multiple states is not practical. Sales tax automation tools—TaxJar, Avalara, and Vertex—integrate with e-commerce platforms, automatically calculate the correct tax rate for each transaction (accounting for state, county, and city rates), file returns automatically in each nexus state, and maintain compliance records.

TaxJar's starter plan (approximately $19 to $25/month) handles the return filing automation that removes the monthly multi-state filing burden. The cost is typically recoverable through the time saved and the error reduction it produces.

For sellers with only home-state nexus, manual filing is manageable. For sellers with three or more states, automation is cost-effective from the start.

WHAT HAPPENS IF YOU'VE BEEN NON-COMPLIANT

Sales tax non-compliance accumulates interest and penalties. States are increasingly sophisticated at identifying out-of-state sellers who have exceeded nexus thresholds and failed to register—they use third-party data, marketplace reports, and audit programs.

The most common resolution for prior non-compliance is Voluntary Disclosure Agreements (VDA). Most states allow sellers to come forward proactively, acknowledge prior non-compliance, and receive a reduced lookback period (typically three years instead of the full statute of limitations) and waiver of penalties. The VDA typically requires paying the back taxes plus interest for the reduced lookback period but avoids the full penalty exposure of a state audit.

The Multistate Tax Commission (MTC) operates a national voluntary disclosure program that allows sellers to apply to multiple states simultaneously—simplifying the process for sellers with multi-state non-compliance.

SALES TAX VS. USE TAX

Sales tax is collected from buyers by sellers. Use tax is owed by buyers who purchase taxable items from sellers who didn't collect sales tax—effectively the complement of sales tax for consumer-direct purchases. If you purchase inventory or equipment from out-of-state suppliers who don't collect your state's sales tax, your state may require you to self-report and pay use tax on those purchases.

Use tax compliance is widely ignored at the individual and small business level—but it technically applies to taxable purchases from non-collecting out-of-state vendors. For significant equipment purchases where the supplier didn't collect sales tax, use tax reporting is a compliance consideration worth being aware of even if enforcement is limited.

Sales tax complexity is real but manageable. Most side hustlers selling through major marketplaces have nothing to do—the platform handles it. Those selling through their own channels need registration in nexus states, configuration of their e-commerce platform, and either manual filing or automation software. The compliance burden is proportional to the business's reach, and the rules are clearer today than they were before Wayfair.