You’re scaling your e-commerce business, hitting new revenue milestones, and shipping to customers across the country. What you might not realize is that every sale into a new state could be quietly creating a tax obligation you don’t know about.
Sales tax nexus—the connection that triggers your responsibility to collect and remit state sales tax—has become one of the most common financial blind spots for growing online sellers. If you want a broader view of the finance risks and growth planning that come with scaling, explore our Fractional CFO Services for E-commerce Brands resources. This guide breaks down how nexus works, the types that affect e-commerce businesses, how to determine where you have obligations, and what to do if you’ve fallen behind on compliance.
What is sales tax nexus
Sales tax nexus is the connection between your business and a state that triggers an obligation to collect and remit sales tax. When you have nexus in a state, that state can legally require you to charge sales tax to customers, register for a permit, and file regular returns. Without this connection, a state simply has no authority over your business when it comes to collecting its taxes.
For years, nexus was straightforward: if you had a physical presence in a state, like an office or warehouse, you had nexus there. That changed in 2018 with the Supreme Court’s decision in South Dakota v. Wayfair. The ruling allowed states to require tax collection based purely on economic activity—meaning sales revenue or transaction volume—even if you’ve never physically been in that state.
Today, nearly every state with a sales tax has adopted economic nexus rules. So as your e-commerce business grows and sells into more states, you’re likely creating new tax obligations without realizing it.
The hidden financial risks of sales tax nexus for scaling businesses
For growing e-commerce companies, sales tax nexus is one of the most overlooked financial risks. As you scale and sell into new markets, you often unknowingly trigger nexus in multiple states. This exposure tends to go unnoticed until it becomes expensive to fix.
Unexpected back tax liabilities
States can assess back taxes for every period when you had nexus but failed to collect and remit sales tax. This liability builds up quietly while you’re focused on growth. Many business owners discover years of uncollected taxes all at once, and that kind of financial shock can threaten the company’s stability.
Penalties and interest that compound over time
Beyond the back taxes themselves, states add penalties for late registration and filing, plus interest on unpaid amounts. The longer you remain non-compliant, the more these charges stack up. What might have been a manageable tax bill can turn into a serious financial burden.
Cash flow disruption from sudden collection requirements
Discovering a nexus obligation means immediate, unplanned costs: state registration fees, sales tax software, and professional service fees. You also have to start collecting tax from customers right away. This sudden shift can throw off carefully planned cash flow forecasts—especially if you’re already wrestling with seasonal purchasing and stock levels (see our guide on the Q4 inventory cash flow trap for e-commerce brands for related cash crunch dynamics).
Due diligence red flags that delay or kill deals
When your business is being sold or seeking investment, buyers and investors examine sales tax compliance closely during due diligence. Unresolved nexus issues raise red flags that can lower your valuation, delay closing, or cause a deal to fall apart entirely. If you’re planning for an eventual sale, it also helps to understand how tax, margins, and operational maturity show up in outcomes—here’s a deeper look at e-commerce valuation and exit planning.
Types of sales tax nexus that affect e-commerce sellers
E-commerce businesses face four main types of nexus:
- Physical nexus: Created by having a tangible presence in a state
- Economic nexus: Created by exceeding a state’s sales revenue or transaction count threshold
- Click-through nexus: Created by referral agreements with in-state residents or businesses
- Affiliate and marketplace nexus: Created by relationships with third-party affiliates or sales on marketplace platforms
Physical nexus
Physical nexus comes from having a tangible presence in a state. Obvious triggers include offices, employees, or warehouses. But less obvious activities can create physical nexus too—storing inventory in a third-party logistics warehouse, having a remote employee in a state, or attending a trade show. Even drop-shipping arrangements where a supplier holds inventory on your behalf can trigger physical nexus.
Economic nexus
Economic nexus kicks in when you meet a state’s specific sales or transaction threshold, even without any physical presence. Since the Wayfair decision, economic nexus has become the most common way e-commerce businesses trigger collection obligations. Each state sets its own thresholds, which vary quite a bit.
Click-through nexus
Some states impose click-through nexus when an out-of-state business generates sales from referrals by in-state residents. This typically applies when you pay commissions to affiliates who send customers to your website through links.
Affiliate and marketplace nexus
Affiliate nexus comes from relationships with in-state individuals or businesses that help establish a market for your products. This is different from marketplace facilitator laws, where platforms like Amazon or Etsy collect and remit sales tax on behalf of third-party sellers in most states.
Economic nexus thresholds by state
Each state sets its own threshold for economic nexus, usually based on annual sales revenue or transaction count. These thresholds vary significantly from state to state.
| State | Sales Threshold | Transaction Threshold | Notes |
|---|---|---|---|
| California | $500,000 | None | Origin-based for in-state sellers |
| Texas | $500,000 | None | Destination-based |
| Florida | $100,000 | None | Recently enacted |
| Illinois | $100,000 | 200 transactions | Meeting either threshold triggers nexus |
Tip: State laws change frequently. Always verify current thresholds directly with the state’s department of revenue or a qualified tax professional.
How to determine where your business has sales tax nexus
Figuring out your nexus exposure takes a systematic approach. Here’s a step-by-step process to get a clear picture of where you have obligations.
1. Audit your sales by state
Start by running a report from your e-commerce platform or accounting system that shows total sales revenue and transaction counts by destination state. This helps you spot which states have meaningful sales volume and are approaching economic nexus thresholds.
2. Identify physical presence triggers
Next, review your business operations for activities that could create physical nexus. Look at:
- Locations of all employees, including remote workers and contractors
- Addresses of offices, warehouses, or other physical locations
- Inventory locations, including 3PL and Amazon FBA warehouses
- States where you attend trade shows or conduct sales meetings
3. Compare revenue against state thresholds
Take your sales data and compare it against each state’s economic nexus threshold. Track both trailing twelve-month and calendar-year figures, since states use different measurement periods to determine when you’ve crossed the line.
4. Review marketplace and affiliate relationships
Finally, review all third-party relationships, including affiliate marketing programs and referral partners. Even if a marketplace collects tax on your behalf, those sales may still count toward your economic nexus threshold for direct sales through your own website.
How marketplaces affect your nexus obligations
Marketplace facilitator laws have created a lot of confusion for sellers. Understanding the difference between what the marketplace handles and what falls on you is critical.
Amazon and marketplace facilitator laws
In most states, marketplace facilitator laws require platforms like Amazon, Etsy, and Walmart to collect and remit sales tax on behalf of third-party sellers. However, this doesn’t mean you’re completely off the hook. Some states still require you to register for a permit and file returns, even if you’re reporting zero tax collected.
Shopify and direct sales platforms
Platforms like Shopify and BigCommerce work differently—they’re e-commerce platforms that give you tools to sell directly to consumers, not marketplace facilitators. If you sell through your own Shopify store, you’re fully responsible for determining nexus, registering for permits, configuring tax collection, and remitting taxes to the states.
Multi-channel sellers and overlapping obligations
Businesses selling through both marketplaces and their own websites face the most complexity. Here’s the tricky part: sales made on a marketplace, even though the marketplace remits the tax, often still count toward a state’s economic nexus threshold. So your Amazon sales could trigger a nexus obligation for your Shopify sales in that same state.
What happens when you ignore sales tax compliance
Ignoring sales tax obligations doesn’t make them go away. It only increases the eventual cost and disruption when the issue surfaces.
State audits and back tax assessments
States actively audit e-commerce businesses using data from payment processors, shipping carriers, and marketplaces. An audit typically involves a state requesting years of sales records, which can lead to assessments for back taxes, penalties, and interest going back several years.
Penalties that exceed the original tax owed
Penalties for non-compliance can be steep, especially if a state determines the failure was willful. Some states impose fraud penalties that are significantly higher than standard late-payment penalties—sometimes exceeding the original tax amount itself.
Reputational and operational disruption
An audit consumes significant management time and attention, pulling focus away from growing the business. If a state places a tax lien on your business, it becomes a public record that can damage relationships with suppliers, lenders, and customers.
How to manage past non-compliance
If you’ve discovered historical sales tax exposure, there’s a clear path forward to get compliant while minimizing penalties.
Voluntary disclosure agreements explained
A Voluntary Disclosure Agreement, or VDA, is a formal process offered by most states that allows you to proactively report past-due sales tax. In exchange for coming forward voluntarily, states typically waive penalties and limit the “look-back” period to three or four years, regardless of how long you were actually non-compliant.
When to self-report vs. wait
Self-reporting proactively is almost always the better approach. It lets you control the process, limit your financial exposure, and demonstrate good faith to the state. Waiting is risky—if the state discovers you first, you’ll face a full audit with no penalty relief and an unlimited look-back period.
Working with professionals to minimize exposure
Navigating historical non-compliance is complex, and it’s best handled with expert help. A specialized tax professional or strategic finance partner can accurately assess your exposure, negotiate VDAs on your behalf, and structure a remediation plan before the issue becomes a crisis.
How to build a sales tax compliance process
Once you’ve addressed past issues, building a sustainable compliance process keeps you on track as you continue to grow.
1. Register for sales tax permits in nexus states
Before collecting any sales tax, register for a permit in each state where you have nexus. Collecting tax without a permit is illegal in most states.
2. Configure tax collection in your sales platforms
Configure your e-commerce platforms to collect sales tax at the correct rates. Most modern platforms integrate with sales tax automation tools that handle real-time rate calculations across thousands of jurisdictions.
3. Classify products and apply exemptions correctly
Not all products are taxed the same way in every state. Digital goods, SaaS, clothing, and food often have unique taxability rules or exemptions. Incorrect classification is a common source of audit risk.
4. Automate filing and remittance
Use sales tax automation software like TaxJar, Avalara, or Anrok to prepare and file returns automatically. Automation reduces errors and frees your team for higher-value work.
5. Monitor thresholds monthly
Sales tax compliance isn’t a one-time project. Monitor sales by state on a monthly basis to track your progress toward triggering nexus in new states, and stay current on changes to state laws and thresholds.
How sales tax compliance affects your business valuation
Strong sales tax compliance connects directly to your company’s enterprise value and exit readiness. For potential buyers and investors, clean sales tax records signal operational maturity and a well-run business.
On the flip side, unresolved liabilities discovered during due diligence can reduce your net proceeds through purchase price reductions or escrow holdbacks. Viewing compliance as an investment in your company’s future options—rather than just a cost of doing business—is key to maximizing value when it’s time to sell.
How a strategic finance partner helps you stay compliant
A strategic finance partner or fractional CFO acts as a navigator for your growing business, helping you chart the course while watching for obstacles like sales tax nexus. They integrate compliance monitoring into your overall financial picture, spotting when you’re approaching thresholds and building compliance costs into cash flow forecasts.
This kind of proactive oversight lets you focus on growth, confident that your financial foundation is solid. To see how this approach can protect and grow your business, explore our outsourced CFO leadership.
Ready to get ahead of nexus risk and protect your margins? Book a call with Bennett Financials.
