You ship products to customers in Texas, California, Florida, and New York. You have never had a single employee outside your home state. No office. No warehouse. No physical presence anywhere else. And yet — you may owe sales tax in every one of those states.
This is not a new rule. It has been the law since June 2018. But I still talk to online sellers every week who do not know it applies to them. This guide explains exactly how it works — and what you need to do about it.
Before 2018: The Old Rule
For decades, the rule was simple. If you had no physical presence in a state — no office, no warehouse, no employees — that state could not make you collect sales tax. This was called the physical nexus rule, and it held for 50 years.
Then the internet came.
Amazon, Shopify, eBay — suddenly billions of dollars were flowing across state lines with zero sales tax collected. States were watching their tax base shrink in real time. South Dakota decided to fight back. In 2016, it passed a law saying that even sellers with no physical presence in the state would owe sales tax once they sold enough into it.
The Wayfair Case — What Actually Happened
South Dakota’s 2016 law said: if you sell more than $100,000 into our state, or complete more than 200 transactions here, you owe us sales tax — physical presence or not.
Wayfair, Overstock, and Newegg refused to comply and sued South Dakota. The case went all the way to the Supreme Court. On June 21, 2018, the Court ruled 5–4 in South Dakota’s favor.
Having a building or an employee in a state was no longer the only thing that mattered. The new standard: how much you sell into a state can now be enough on its own to create a tax obligation. This is called economic nexus. Within 18 months of that ruling, nearly every state in the country had passed its own version of it.
What Is Economic Nexus — In Plain Terms
Nexus just means connection. A connection strong enough that a state can legally require you to collect its sales tax.
Before Wayfair, that connection had to be physical — a store, a warehouse, an employee on the ground. After Wayfair, that connection can be purely economic. Sell enough into a state, and you are connected.
How the Threshold Is Actually Calculated
This is where a lot of business owners get tripped up. The $100,000 or 200-transaction threshold is not always as simple as it sounds.
- Gross sales vs. taxable sales: Most states count your total sales into that state — including wholesale, exempt, and marketplace sales — not just the ones you would charge tax on. A few states, like California, count only taxable sales. Check each state’s specific rule before assuming you are under the line.
- Which 12 months count: Most states look at the current or prior calendar year. Some use a rolling 12-month period instead, which means you could cross the threshold mid-year even if you were under it on December 31st.
- Once you are in, you are in: In most states, crossing the threshold does not just create an obligation going forward. Many states require you to register and start collecting for the remainder of the current year and into the next — even if your sales dip back below the threshold later.
The practical takeaway: do not just glance at your total revenue. Pull a state-by-state breakdown and check it against each state’s specific rules.
Here Is How It Plays Out in Practice
Example: Your Shopify Store — Based in Virginia
In 2024, your store does:
- $145,000 in sales to Texas customers
- $92,000 in sales to Florida customers
- $38,000 in sales to Colorado customers
- 240 separate orders shipped to Illinois customers
Result: You now have economic nexus in Texas, Florida, and Illinois. Colorado is close — worth watching closely.
In each of those states, you are now legally required to register, collect, file, and remit sales tax.
The Thresholds — State by State
Most states use $100,000 in annual sales OR 200 transactions as the trigger. But not all of them. Here is what you need to know about the major states:
| State | Threshold |
|---|---|
| California | $500,000 in sales (no transaction count) |
| Texas | $500,000 in sales (no transaction count) |
| New York | $500,000 in sales AND 100 transactions |
| Florida | $100,000 in sales (no transaction count) |
| Illinois | $100,000 OR 200 transactions |
| Pennsylvania | $100,000 in sales (no transaction count) |
| Ohio | $100,000 OR 200 transactions |
| Washington | $100,000 in sales (no transaction count) |
| Georgia | $100,000 OR 200 transactions |
| Colorado | $100,000 in sales (no transaction count) |
Note: Five states have no sales tax at all — Alaska, Delaware, Montana, New Hampshire, and Oregon. California dropped the 200-transaction test entirely in 2023. Several other states are following suit.
How to Check Where You Stand Right Now
Pull a state-by-state sales report for the trailing 12 months from your e-commerce platform or accounting software. Compare each state’s total to the thresholds above. Any state where you are within about 20% of the threshold is worth watching closely — and any state you have already crossed needs attention now, not at year-end. This one report tells you whether you have an issue, and roughly how big it is.
The Amazon / Shopify Trap
This is the part most sellers miss.
Amazon, Etsy, and Walmart Marketplace collect and send sales tax to the state on your behalf — handling what you would otherwise have to manage yourself. These platforms are called marketplace facilitators, and all 45 sales tax states require them to do this. So, if you only sell on Amazon, you are largely covered.
Here is the catch: Your Shopify sales tax obligations don’t disappear just because Amazon is handling its half — your direct store sales still count toward your nexus threshold in every state. Even if Amazon is separately handling tax on its own sales to those same states.
Real scenario — Illinois:
- $55,000 through Amazon — Amazon handles this tax collection
- $52,000 through your own Shopify store — your responsibility
Combined: $107,000. You have crossed the $100,000 Illinois threshold. Amazon handled its half. The half sold through Shopify was your responsibility the moment you crossed the line.
August 2025 update: Meta announced that Facebook and Instagram would no longer act as marketplace facilitators. Sellers are now responsible for collecting and remitting sales tax on Facebook and Instagram Shop sales, depending on state rules. Many sellers are still unaware of this change.
Selling to Other Businesses? Do Not Skip This
If your customers include resellers, contractors, or other businesses buying for resale or business use, some of your sales may be exempt from sales tax — but only if you have the paperwork to prove it.
- Collect a resale or exemption certificate from each business customer claiming exemption, before or at the time of the sale.
- Keep certificates on file for as long as the state’s audit lookback period — typically 3 to 4 years, sometimes longer.
- Without a valid certificate, the state can hold you responsible for the tax on that sale, even if your customer genuinely qualified for the exemption.
This applies whether or not you have crossed an economic nexus threshold in that state — it is a separate compliance requirement that often gets overlooked once registration is sorted out.
What About Digital Products?
Physical goods have been taxable for a long time. Digital products are a different story. The rules are completely inconsistent across states:
- SaaS (software subscriptions): taxable in Texas, New York, and Pennsylvania — but not in California or Florida.
- Digital downloads (e-books, courses, music): taxable in most states, but what counts as a digital good varies by state.
- Professional services (consulting, design, legal): generally, not taxable, but some states tax specific service types.
If you sell anything digital, you cannot assume the same rules apply everywhere. Every state needs to be checked individually.
It Is Not Just Sales Tax — Income Tax Nexus Too
Most of this article is about sales tax, but crossing an economic threshold can trigger a second, separate issue: state income or franchise tax nexus.
(A franchise tax is not only for franchise businesses. It is what some states call a fee for the right to operate there, charged separately from regular income tax.)
Many states — including California, New York, Texas, Washington, and Ohio — have their own economic nexus rules for corporate income tax, franchise tax, or gross receipts tax. They often use a similar sales-dollar threshold, commonly $500,000, though it varies by state.
This means a business can be required to register for sales tax in a state and, separately, file a state income or franchise tax return there — even with no employees, office, or inventory in that state. The two obligations are evaluated independently, so clearing the sales tax question does not automatically clear the income tax question.
If your business sells into states where you do not currently file an income or franchise tax return, it is worth having a tax professional check both nexus questions together rather than one at a time.
What Happens After You Cross a Threshold
Say you cross the $100,000 mark in Illinois on October 14th. Most states give you until the first day of the following month — November 1st in this case — to start collecting. From that date, you are legally required to:
- Register with the Illinois Department of Revenue (free, done online)
- Turn on Illinois sales tax collection in your Shopify or WooCommerce settings
- File your first return on the schedule Illinois assigns (monthly, quarterly, or annual, based on your volume)
- Remit every dollar you have collected to Illinois on time
Important: Missing one filing is an easy mistake to make if you don’t have a compliance calendar — and it can ripple into your cash flow fast. Build one. If you do not file and remit on time, interest and penalties start the day after the due date. If you do not have a compliance calendar, build one.
Registering Is Not a One-Time Task
Once you are registered in a state, you must keep filing on that state’s schedule — monthly, quarterly, or annually — for as long as you are registered. That includes periods where you had zero sales in that state.
These are called zero returns. Skipping them because there was nothing to report is one of the most common ways businesses rack up late-filing penalties without ever owing additional tax. If your sales tax software or accountant handles automatic filing, confirm that zero-sales months are included — not just months with activity.
What If You Are Already Behind?
This is the most common situation I deal with. A business has been selling online for three or four years. They crossed nexus thresholds in multiple states without realizing it. They are now sitting on unfiled obligations and potential back liability.
Here is the good news: there is a clean way to get current.
Most states offer a Voluntary Disclosure Agreement, or VDA. Here is how it works:
- You — or your representative — approach the state proactively, before they find you
- You disclose that you have unfiled sales tax obligations
- The state typically limits the lookback period to 3 to 4 years, even if you have been selling longer
- Penalties are waived entirely in exchange for filing and paying the tax owed
- The whole process can usually be started anonymously — you are not identified to the state until the agreement terms are set
States that find you before you come forward can look back further and hold you to full penalties — which means acting first almost always costs far less. 24 states also participate in the Streamlined Sales Tax (SST) program, which lets you register in all participating states at once through a single application, and in some cases includes amnesty for back periods you have not yet filed.
5 Steps to Get Compliant — and Stay There
- Run a nexus study. Pull state-by-state sales for the last two years and compare against the threshold table above.
- Decide where you have exposure. Identify every state where you have crossed a threshold and how long ago.
- Address back liability before registering. If you have had nexus in prior years and were not collecting, do not rush to register. Registering first can open the door to a lookback audit in some states. First, assess your VDA options. A tax professional can approach the state anonymously on your behalf, negotiate the lookback period, and get penalties waived before your identity is disclosed.
- Register and configure your platform. Register with each state’s Department of Revenue — most have online portals and most registrations are free ($50–$100 in a few states). Then configure your platform to collect the right rate. Tools like TaxJar and Avalara can handle automated rate lookup. Check that your products are mapped correctly — miscategorized items mean wrong tax collection.
- Build a compliance calendar and review it quarterly. Track filing due dates for every state you are registered in, including zero-return months, and re-run your nexus study each quarter as your sales grow into new states.
Final Takeaway
Economic nexus compliance is not complicated once you understand it. The businesses that end up sorting out years of back obligations at once are the ones who kept growing, kept selling into new states, and assumed it was someone else’s problem.
The path forward is almost always straightforward: nexus study, VDA if needed, register, configure, file. That is the whole process.
If you are not sure where you stand, start with the data. Pull your state-by-state sales for the last two years and see where you land against the thresholds. That one step tells you whether you have an issue — and roughly how big it is. It is worth running those numbers every quarter as your business grows.
Ready to find out where you stand?
If you would rather not navigate this on your own, that is exactly what we are here for. Reach out to Datastub and we will walk through your numbers with you — no guesswork, just a clear picture of where you stand and what needs to happen next.
Disclaimer: This article is for general information only and does not constitute tax advice. Every business’s situation is different. Please consult a qualified tax professional before making compliance decisions for your business.