This page describes a composite hypothetical. It is not a real client or a real result. State thresholds and rules vary and change, and the figures below are assumptions.
The Scenario in Brief
An online retailer that started selling to a small local market now ships to customers across the country. The owner has never registered for sales tax outside the home state. A marketplace platform sends a notice about state sales tax collection requirements. The owner asks an advisor to help understand where the business might have obligations.
Assumptions Used
- Annual sales are 900,000 dollars, of which 360,000 dollars are to customers in the home state.
- The remaining sales are spread across other states, with three of them being significant: State X with 120,000 dollars of sales and 150 transactions, State Y with 60,000 dollars and 90 transactions, and State Z with 40,000 dollars but 260 transactions.
- Assumed economic nexus thresholds for illustration: 100,000 dollars of sales or 200 transactions in a year, with differences from state to state.
- The business has no employees, inventory, or property outside the home state, except that some inventory is stored in a third-party fulfillment center in State Y, which the owner did not previously consider.
- Net profit is 180,000 dollars.
Applying the Thresholds
The advisor would explain that after a Supreme Court decision, states may require remote sellers to collect sales tax if they exceed economic nexus thresholds, even without physical presence. Each state sets its own thresholds and counting rules.
| State | Sales | Transactions | Result under assumed thresholds |
|---|---|---|---|
| State X | 120,000 dollars | 150 | exceeds the sales threshold, so registration and collection likely required |
| State Y | 60,000 dollars | 90 | below thresholds, but inventory in a fulfillment center may create physical presence nexus |
| State Z | 40,000 dollars | 260 | exceeds the transaction threshold in states that use one, so registration may be required |
The advisor would point out that the answers depend on each state's actual rules. Some states no longer use a transaction count. Some count marketplace sales differently. The result in this table is illustrative, not a determination for any real state.
The Fulfillment Center Issue
Storing inventory in a third-party fulfillment network can create physical presence in the states where it is held, even if the seller did not choose the location. The advisor would ask the owner to obtain a list of the states where inventory is stored. This is a common surprise. If the inventory location creates nexus, sales tax and possibly income tax obligations may follow.
Marketplace Facilitators
If the business sells through a marketplace that collects and remits sales tax on its behalf, those sales may not require the owner to collect. The advisor would review which sales go through marketplaces and which are direct, since the obligations differ. Sales tax exposure may be lower than the gross numbers suggest.
Income Tax Apportionment
For income tax, the business might have nexus in states beyond the home state if it has physical presence or exceeds a state's economic threshold for income or gross receipts taxes. Many states apportion income using a sales factor. As a simple illustration, suppose State Y's inventory creates income tax nexus and 6.7 percent of sales, or 60,000 of 900,000 dollars, are sourced there. Applying 6.7 percent to 180,000 dollars of profit gives about 12,000 dollars of apportioned income, taxed at the state's rate, perhaps with credits at the home state. The advisor would calculate the potential tax and consider minimum taxes or fees that could apply. This is an illustration, not a determination.
Cleaning Up
If the owner has been collecting no tax where it was required, the advisor would discuss voluntary disclosure programs in some states, which can limit look-back periods and penalties if the business comes forward before being contacted. The advisor would also recommend software or a service that tracks nexus and rates and would suggest reviewing where inventory is held.
Scenario Variations Worth Considering
If the business sold services instead of goods, state sales tax rules could differ significantly. If the business used only its own warehouse, physical presence would be limited to the home state. If the volume in State Z rose above the dollar threshold, the analysis would be clearer. If the owner planned to expand into another region, nexus planning could be built into the strategy.
Risks and Limits
- Thresholds and definitions differ by state.
- Penalties and interest can accumulate.
- The tax may be owed even if it was not collected from customers.
- The table is illustrative only.
What This Scenario Teaches
Growth across state lines creates obligations that may arrive before the owner notices. A periodic review, using current data on sales and inventory locations, is a manageable way to stay ahead of them.
Questions to Bring to Your Advisor
- In which states do I have nexus for sales tax and for income tax?
- Where is my inventory stored?
- Should I use a voluntary disclosure program?
- How should I track thresholds going forward?
Frequently Asked Questions
Do I need to collect sales tax everywhere I have customers?
Not necessarily. It depends on each state's thresholds, whether you have physical presence, and whether marketplaces collect on your behalf.
Are the thresholds in the scenario real?
They are assumptions for illustration. States set their own thresholds and change them.
Want to Talk Through Your Own Situation?
These scenarios are illustrations only. Book a discovery call with AE Tax Advisors to discuss the facts of your own business or portfolio.
Book a Discovery CallEducational purposes only. This page is an illustrative educational scenario, not tax, legal, or accounting advice, and it does not describe a real client or a real result. Tax laws change and outcomes depend on individual facts, so consult a qualified professional before acting. No result is guaranteed.