A Business Guide to Charging Out-of-State Sales Tax

As e-commerce continues to grow, one of the most common questions businesses face is: “When do I need to charge sales tax to customers in another state?” The answer isn’t always straightforward, and it depends on a concept known as nexus.

Understanding Sales Tax Nexus

“Nexus” means a sufficient connection between your business and a state. If you have nexus in a state, you are generally required to collect and remit sales tax on sales shipped to customers there.

There are two main types of nexus:

1. Physical Nexus – Established if your business has a physical presence in the state. This could include:
   • An office, warehouse, or store
   • Employees or contractors working there
   • Inventory stored in third-party warehouses (like Amazon FBA)
2. Economic Nexus – Established if your sales in the state exceed certain thresholds, even if you have no physical presence. Most states set thresholds around $100,000 in sales or 200 transactions per year, though specifics vary by state.

When You Must Charge Out-of-State Sales Tax

You’ll need to collect sales tax on sales to customers in another state if:

• You meet or exceed that state’s economic nexus threshold, or
• You have a physical nexus in the state.

For example:

• If your California-based online store ships to New York customers and surpasses New York’s economic threshold, you must register, collect, and remit sales tax in New York.
• If you store inventory in a Texas fulfillment center, you automatically have nexus in Texas, even if your headquarters is elsewhere.

When You Don’t Charge Out-of-State Sales Tax

You typically do not need to charge sales tax in a state if you:

• Do not meet that state’s nexus thresholds.
• Have no physical presence there

In these cases, the customer may still owe use tax to their state, but it’s their responsibility to pay it directly.

Best Practices for Businesses

• Track Sales by State: Regularly review your sales reports to see if you’re approaching nexus thresholds.
• Stay Current with State Laws: Thresholds and rules can change, and each state has its own requirements.
• Register Before Collecting: Always register for a sales tax permit in a state before you begin charging tax there.

The Bottom Line

Charging out-of-state sales tax comes down to whether your business has nexus—either physical or economic—in that state. With the rise of e-commerce, most growing businesses eventually establish nexus in multiple states, making sales tax compliance an essential part of operations.

About Davis Davis & Harmon LLC

Davis Davis & Harmon LLC is a national sales tax advisory firm headquartered in Dallas, Texas, with a mission to deliver world-class sales and use tax solutions to complex organizations. The firm specializes in audit defense, refund recovery, and compliance strategy, serving Fortune 1000 clients across industries. With more than 30 years of expertise, Davis Davis & Harmon is the go-to partner for navigating the complexities of sales tax. Learn more at www.ddhtax.com.