Sales Tax Thresholds: A Guide for Online Sellers & Ecommerce

In this ever-evolving world of online sales, as a business owner you must strengthen your foundation by grasping the concept of sales tax thresholds. Understanding when and where you need to collect sales tax can make the difference between staying compliant or facing avoidable difficulties. 

It’s crucial for sellers to understand the difference between total sales and taxable sales since these factors can affect whether they need to comply with state sales tax regulations. Furthermore, for ecommerce businesses, especially those selling across multiple states, it can be difficult to keep track of different sales tax thresholds by state. 

However, understanding these tricky variations can save you time, money, and potential inconveniences in the long run. This comprehensive guide from Commenda will help you as an online seller navigate the complexities of sales tax thresholds, and ensure that you know when to collect, report, and remit sales taxes on the online transactions.

What Are Sales Tax Thresholds?

Sales tax thresholds are the specific sales volumes or transaction counts that trigger the requirement for an online seller to begin collecting sales tax in a given state. These thresholds are established by individual states and apply to businesses that sell products or services to customers within that state. Once a seller exceeds the threshold, they are legally obligated to collect and remit sales tax on the qualifying transactions.

Total Sales vs. Taxable Sales

One key distinction that sellers must understand is whether thresholds apply to total sales or taxable sales. Total sales include all revenue from sales, while taxable sales only include sales of taxable goods or services.

Some states require sellers to collect sales tax once their total sales in the state exceed a certain amount, while others may only consider taxable sales. For instance, if your business makes $100,000 in total sales but only $80,000 of that is taxable, you may still need to track your taxable sales to determine if you've exceeded the threshold in that state.

Sales Tax Thresholds: State-Specific Rules

Each state has its own threshold for when sales tax collection becomes mandatory. Some states have set thresholds as low as $100,000 in sales, while others may set a higher threshold, such as $500,000. It's essential to review state-specific sales tax thresholds regularly to stay compliant. Below are some ranges for sales tax thresholds in the U.S.:

• $100,000 in sales or 200 transactions: Many states, including Connecticut and Illinois, use this threshold.
• $500,000 in sales: States like Texas and California apply this higher threshold for sales tax obligations. (source: Sales Tax Institute)

Maintaining a good understanding of these thresholds and knowing how to report your sales is vital for avoiding penalties and staying compliant with state laws.

Do You Need to Collect Sales Tax if You Don’t Meet the Threshold?

A frequent question among online sellers is whether they need to collect sales tax if they do not meet the sales tax threshold. The short answer to this would be, no. If your sales do not tally up to the threshold set by the state under consideration, you are not generally required to collect sales tax in that state. However, once you exceed the threshold, you become obligated to collect sales tax on all transactions within that state. 

Nonetheless, even if you don’t meet the threshold, nexus laws can still apply. Nexus refers to the connection between a business and a state, and it can be triggered by factors such as having employees or physical presence in that state. If your business has a nexus in a state, you may need to collect sales tax regardless of whether you meet the threshold for total sales. You can learn more about this here.

Sales Tax Thresholds for Online and Ecommerce Sales

For online sellers, understanding how sales tax thresholds apply to ecommerce sales is essential. In the past, online businesses only had to collect sales tax in states where they had a physical presence. However, with the introduction of economic nexus laws, the rules have dramatically altered.

Economic Nexus and Online Sales

Economic nexus refers to a business’s obligation to collect sales tax in a state due to its economic activity, even if the business does not have a physical presence in that particular state. Several states have established economic nexus thresholds based on either sales volume or transaction count. Typically, these thresholds fall between $100,000 and $500,000 in sales or around 200 transactions.

Simply put, for online sellers, the introduction of economic nexus laws means that you may now be required to collect sales tax in states where you have significant sales, even if you don’t have a physical store, office, or employees there. It's critical to track sales in each state to ensure that your business is in compliance with local tax laws.

What Is the Minimum Sales Threshold for Sales Tax?

The minimum sales threshold is the specific sales volume or number of transactions that a business must reach before it is required to collect sales tax in a given state. As discussed, this threshold varies from state to state and is a crucial figure for ecommerce businesses to monitor in order to remain compliant with tax laws.

For example, some states may set the threshold at $100,000 in total sales or 200 transactions. Once your business exceeds these limits, you are obligated to collect and remit sales tax on all taxable sales made to customers in that state. However, it is important to maintain clarity on the concepts of total sales and taxable sales and the jurisdiction-wise considerations of applicable thresholds.

Additionally, some states set annual thresholds, meaning you must evaluate your total sales for the entire calendar year, not just within a single month or quarter. This means that even if you don’t meet the threshold initially, a surge in sales toward the end of the year could push you into the obligation to collect sales tax. Therefore, ecommerce businesses must keep track of sales not just in real-time but over the course of the year to stay ahead of any potential tax collection requirements.

Changes to Sales Tax Thresholds for Online Sales

Over the past few years, many states have raised or adjusted their sales tax thresholds due to changes in how sales tax is applied to online transactions.

In the wake of the South Dakota v. Wayfair, Inc. decision in 2018, the U.S. Supreme Court ruled that states could require online sellers to collect sales tax even if they did not have a physical presence in the state. This decision led to changes in sales tax reporting thresholds, with many states adopting new economic nexus laws. (source: Tax Foundation)

How Have Thresholds Changed?

Prior to the Wayfair ruling, most states required sellers to collect sales tax only if they had a physical presence (a store, warehouse, or employees) in the state. Now, as a result of the Wayfair ruling, many states have set up economic nexus thresholds based on sales volume or transactions, impacting online retailers across the country. 

For instance,

Before the Wayfair decision: California required sellers to collect sales tax only if they had a physical presence in the state.

‍

After the Wayfair decision: California set up an economic nexus threshold based on sales volume. As of April 25, 2019, sellers must collect sales tax if they have $500,000 in sales in California within a year. (source: Sales Tax Institute)

Frequently Asked Questions: Threshold Sales Tax Analysis

1. Do sales tax thresholds apply to total sales or taxable sales?
   Sales tax thresholds can apply to either total sales or taxable sales, depending on the state. Total sales refer to all revenue from sales, while taxable sales only include transactions subject to sales tax. It's important to understand which type of sales a state considers when calculating a business’ sales tax obligations.

‍

2. How does economic nexus affect my state-specific thresholds?
   Economic nexus laws require businesses to collect sales tax in states where they meet certain sales volume or transaction thresholds, even if they have no physical presence in that state. This means that if your sales or number of transactions in a state exceed the economic nexus threshold, you may be required to collect sales tax, regardless of whether you have a physical presence there.

‍

3. Should I use an automation tool to track my sales tax obligations?
   Using an automation tool to track your sales tax obligations is highly recommended. These tools can help you monitor your sales across multiple states, ensure you stay within the applicable thresholds, and manage your sales tax collection and remittance efficiently, reducing the risk of compliance errors and consecutive penalties.

‍

4. What are my obligations if I exceed the sales tax threshold?
   If you exceed the sales tax threshold in a state, you are required to start collecting sales tax on all taxable transactions within that state. This obligation is triggered once your sales surpass the threshold, so it’s crucial to monitor your sales and transactions carefully to ensure compliance. 

Our team at Commenda can guide you through this process and address any additional questions you may have. Book a free demo with us today!

Economic Threshold on Internet Sales Tax

When it comes to internet sales tax, the economic threshold plays a key role in determining when an online seller is required to collect sales tax in a specific state. This threshold is based on either the seller's sales volume or the number of transactions they make within that state.

This is especially important for remote sellers and international businesses that sell to U.S. customers. While these businesses may not have a physical location in the U.S., they must comply with state-specific sales tax laws once they exceed the economic nexus threshold. This includes collecting sales tax, registering for a sales tax permit, and filing returns where required. 

Comprehending and tracking economic thresholds is essential for online retailers, as failure to comply can lead to significant fines, penalties, and interest charges. By staying informed and proactive, businesses can avoid these costly consequences and remain compliant with state tax regulations. This is where Commenda steps in. We can help streamline your sales tax compliance process, so you can focus on growing your business.

When Are Sales Tax Prepayments Required?

In some states, sales tax prepayments are required even before a seller exceeds the economic nexus threshold. These prepayments are usually due on a monthly or quarterly basis, depending on the rules of the relevant state, and the business’ sales volume. The purpose of these prepayments is to help businesses stay compliant and avoid large, lump-sum payments at the end of the year.

Prepayments can also help prevent underpayment penalties and interest charges. If a business’s actual tax liability exceeds the prepayments, they must settle the difference at the end of the reporting period. However, any overpayments may be refunded or credited toward future obligations. Since prepayment requirements vary by state, it’s essential for online sellers to track their sales and understand the specific prepayment rules in each state where they operate.

Conclusion

Understanding sales tax thresholds is essential for any online seller. These thresholds determine when a seller must begin collecting sales tax, and with the rise of economic nexus laws, it’s more important than ever for ecommerce businesses to stay on top of these requirements. Whether you're a remote seller, operating a marketplace, or managing an international business, complying with state-specific sales tax rules helps you avoid penalties and ensures your operations run smoothly. By staying informed and proactive, you can focus on growing your business while confidently meeting your tax obligations.

However, staying on top of the rapidly changing tax laws can be challenging. That’s where Commenda can help. Our sales tax automation platform can simplify the process, ensuring that you’re always in compliance with state-specific sales tax thresholds. Get in touch with us today to streamline your sales tax processes across all states.