What it means
Sales tax is a tax on sales to customers, set by each state and often by cities and counties, that the seller collects from the buyer and pays over to the government. Nexus is the legal term for enough connection with a state that the state can make you do that collecting.
For a long time nexus meant physical presence, like an office, employees or a warehouse. In 2018 the Supreme Court's Wayfair decision let states base it on sales into the state alone. That's called economic nexus, and states with a sales tax have since adopted it.
Each state sets its own threshold, usually a dollar amount of sales into the state in a year, and in some states a number of transactions. Cross it and you register, collect tax on taxable sales there, file returns and pay over what you collected. Whether your product is taxable at all is a separate question, answered state by state.
Most states set the line at $100,000 of sales a year. California and Texas use $500,000, and New York requires both $500,000 and more than 100 sales. Alaska, Delaware, Montana, New Hampshire and Oregon have no statewide sales tax, though Alaska's cities and boroughs can levy their own.
Tax you collect isn't revenue. It sits as a liability, sales tax payable, until you pay it to the state.
Acme sells software to customers across the country. Its monthly report of sales by state shows it has crossed one state's threshold, and its product is taxable there at 8%. Acme registers before invoicing more customers in that state.
Its next invoice there is $1,000 plus $80 of sales tax, $1,080 in total. Revenue is $1,000 and the $80 goes to sales tax payable. When Acme files that state's return for the period, it pays the $80 and the liability goes to zero.
If you cross a threshold and don't collect, the state can still assess the tax, and in practice it usually comes out of your margin. Voluntary disclosure programs can limit the penalties and lookback. Diligence teams ask about nexus early, because uncollected tax is easy to miss in the books.
Why it matters. Since 2018 you can owe tax in a state you've never set foot in. Tax you should have collected and didn't usually comes out of your margin, not the customer's.
Try it with your numbers
Change any number. The working below updates as you type.
Nexus if Sales > Dollar threshold or Transactions ≥ Transaction threshold · Tax = Price × RateCheck the state's own rule. $100,000 was South Dakota's in Wayfair.
Economic nexus
Crossed
How it’s worked out
- 1Sales test$120,000.00 > $100,000.00?Yes
- 2Transaction test150 ≥ 200?No
- 3Sales tax on the invoice$1,000.00 × 8%$80.00
- 4Invoice total$1,000.00 + $80.00$1,080.00
Register before invoicing more customers there. The $80.00 collected is a liability, sales tax payable, not revenue. Whether your product is taxable is a separate, state-by-state question.
The entry, worked
Acme has registered in a state where its product is taxable at 8%. It invoices a customer there $1,000 plus $80 sales tax.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $1,080.00 | |
| Revenue | $1,000.00 | |
| Sales tax payable | $80.00 | |
| Total | $1,080.00 | $1,080.00 |
The $80 is owed to the state, not earned by Acme, so it sits as a liability until Acme remits it.
Common questions
Is SaaS subject to sales tax?
In some states yes, in others no, and a few tax it partly. You have to check state by state.
What if I already crossed a state's threshold without collecting?
The exposure is generally the tax you should have collected, plus interest and penalties. Most states run voluntary disclosure programs that can reduce penalties and limit how many years back you have to go.
When do I have to start collecting after I cross a threshold?
Each state sets its own start date. Some expect you to collect from the next sale, others from the first day of a following month or quarter, and a few from the next calendar year. Check the rule the month you cross, and register before that date.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- Sales tax nexus for startups: when you owe tax in a stateSince Wayfair, selling into a state can create a sales tax obligation. How economic nexus works, why SaaS is taxable in some states and when to register.Guide · 4 min
- How sales tax is calculated: rates, sourcing, roundingHow sales tax is calculated: state plus local rates, origin vs destination sourcing, what’s taxable (SaaS varies) and rounding per line or per invoice.Guide · 6 min
- Registering in a new state: remote hires and nexusA remote hire or nexus in a new state means foreign qualification, payroll tax accounts and maybe a sales tax permit. What to register, in what order.Guide · 6 min
- States without sales tax: the five, and what it meansAlaska, Delaware, Montana, New Hampshire and Oregon have no statewide sales tax. What that means for sellers, local taxes and gross receipts taxes.Guide · 6 min
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.