FAQ: Your top questions about collecting and filing sales tax

Thinking about charging your customers sales tax? Want to learn the basics of sales tax compliance?

While this guide is not a substitute for professional legal or tax advice, we work with hundreds of businesses as they start collecting sales tax from customers. Here are the questions we hear most often from businesses like yours.

FAQ

Do I need to charge sales tax?

Do you sell something you can physically touch? If so, it’s called “tangible personal property” and it’s generally taxable. However, exceptions vary from state to state.
If you sell items through a marketplace, there’s a high likelihood it’s taxable. Whether you or the marketplace are supposed to collect and remit those taxes depends on the state.
Services, SaaS, installation, clothing and apparel, and labor are taxed differently in each state.

If you sell in multiple states, an automated tax solution like Avalara AvaTax can apply the right taxes on products sold in each jurisdiction.

I keep hearing about “nexus” — what is it?

Nexus is the connection between a seller and a state that requires the seller to collect and remit sales tax, and is based on your unique business activity in a given jurisdiction.

What activities create nexus?

You can create nexus in a variety of ways, most of which fall under either physical nexus or economic nexus.

Physical nexus is established by the presence of your business in a state. In addition to a store or office, physical nexus may be triggered by off-site employees, warehouse locations, affiliations, even trade shows attendance.
Economic nexus is determined based on where your customers are located. If you reach a certain sales volume or number of transactions with residents of a jurisdiction, you can trigger nexus.

It’s important to note that you’ll need to register and remit sales tax if you have either physical nexus or economic nexus.

How do I know where I have economic nexus?

You’ll have to match your sales against the requirements for each jurisdiction. We offer a nexus tool to help you determine where you have a nexus obligation. Depending on the number of states you have customers in, tracking software may be a worthy investment. For instance, AvaTax tracks sales in real time, alerting you when you reach 80 percent of nexus thresholds and when you need to register in a new state.

Will I create nexus if I sell on a marketplace?

It depends. Some states require you to register if you sell via Fulfillment by Amazon (FBA), others count FBA sales toward economic nexus thresholds. Additional states have marketplace facilitator laws in place, requiring marketplaces to collect and remit sales tax on behalf of sellers. And if you sell through multiple channels, you may still trigger nexus and be required to register and remit on your own, even in states that collect from marketplaces.

How do I register to collect sales tax?

Determine where you have nexus. Keep in mind that New Hampshire, Oregon, Montana, Alaska, and Delaware (the NOMAD states) do not collect sales tax. However, some jurisdictions within Alaska do impose their own local sales tax. The remaining 45 states and Washington, D.C. all have some form of transaction tax. Start with where you have physical nexus, then identify where you’ve triggered economic nexus.
Register in each state in which you have nexus. Registering through Avalara Licensing is easier than registering with individual departments of revenue.
After you register, collect sales tax in the states you’ve registered in, then submit returns and remit the taxes to the proper tax authority. Avalara can help with this, end to end.

How often do I need to file sales tax returns?

When you register, states determine your filing frequency based on your projected sales volume. The more you sell, the more often you’ll file returns. Like most things sales tax-related, the requirements and deadlines vary from state to state. You can look up deadlines on each state’s department of revenue site or in our state sales tax guides.

I didn’t know I was supposed to register — do I need to worry about past sales?

It depends on the amount of sales you had and in which states. Do you owe more than $10,000 in taxes? A state probably isn’t going to just let that go, and you could create exposure when you register. If you’re concerned about the liability of past sales, schedule a free consultation with our Professional Services team to discuss your options.