published January 27, 2021
If you’re a frequent buyer from the world’s largest online marketplace, Amazon, you probably noticed that a few years ago the online retail giant started collecting state sales tax. Why is Amazon charging tax? The answer actually has more implications for you as the operator of a corporation than you might think.
In an attempt to recapture “lost” sales tax due to out-of-state sales by e-commerce vendors such as Amazon, many states have instituted what are casually called Amazon Laws, Amazon Nexus Rules, or simply online sales tax.
These vary from state to state in both standards and enforcement, but essentially define lower sales limits at which companies are considered to have an “economic nexus” in a state. This tax is also sometimes referred to as Amazon use tax or Amazon sales tax.
If your online sales exceed certain statutory amounts, you may qualify in certain states as having an economic nexus there, which will require foreign entity registration and come with additional tax consequences as well. In this case of these taxes, it is often casually referred to as a click-thru nexus.
Despite the fact that you do not have an office in a state or any employees there, you may still need to do a Foreign Agent Qualification in that state if you reach their definition of what constitutes doing business in the state.
Know Your Limit
Most states, including Massachusetts, New York and Connecticut, use the “economic nexus” threshold set forth in the South Dakota v. Wayfair case of 2018 that set the original precedent: $100,000 or 200 or more separate transactions. In California, the threshold is set at $500,000 in gross online sales for a 12 month period as of 2019.
Once you hit these thresholds, you will need to register your company with a foreign qualification as well as pay any applicable taxes and make any filings required.
I’ve outlined the thresholds for transacting business that necessitate either paying sales tax or reporting to the relevant state in the list below. For brevity, I’ve only included our most popular states. Regardless of your business structure, you’ll likely want to talk to your accountant if you reach these levels.
Click-Thru Nexus Thresholds
In 2020 the threshold is $150,000, and then $100,000 in 2021 and thereafter.
$500,000/year in gross revenue on the previous or current calendar year’s sales.
$100,000/year in gross revenue on the previous or current calendar year’s sales.
$100,000/year in gross revenue, or makes sales into Illinois in more than 200 separate transactions in the previous twelve months.
$100,000 in gross revenue in the previous calendar year or current calendar year, or makes sales into Maine in more than 200 separate transactions in the previous calendar year or current calendar year.
$100,000/year in gross revenue, or makes sales into Maryland in more than 200 separate transactions in the previous or current calendar year.
$100,000 in sales over the preceding calendar year.
Sales of $100,000 in New Jersey, or more than 200 transactions in the state in the current or last calendar year.
$100,000 in annual gross revenue from sales in New Mexico in the last calendar year.
$500,000 per year in gross revenue AND sales made into New York in more than 100 separate transactions in the last four quarters.
Sales of $100,000 or more annually or 200 or more separate transactions into the state in the current or last calendar year.
Sales into Pennsylvania that exceeded $100,000 in the previous 12-month period are considered to have economic nexus.
Sales above $500,000 in Texas in the previous calendar year.
Sales of $100,000 or more in the state, or at least 200 individual sales transactions into the state in the current or last calendar year.
Sales of $100,000 or more in Virginia, or at least 200 individual sales transactions into the state if in the previous or current calendar year.
Sales of $100,000 or more into the state into Washington in the current or last calendar year.
Sales of $100,000 in Washington D.C. or more than 200 transactions in the state in the previous calendar year.
Sales of $100,000/year in gross revenue the previous calendar year, or 200 or more separate transactions in the previous or current calendar year.
Sales of $100,000 or more into the state, or 200 or more separate transactions into the state in the current or last calendar year.
Though it is somewhat hard for states to track your sales, It’s good practice to set some kind of alert if you do exceed these limits, as most are pro-actively seeking this revenue. For example, you may be selling financial software in New York, and could quickly exceed the statutory limit of $500,000 if you have no way of checking your gross sales directly.
Even if your online sales are small (or non-existent) it is in the interest of most companies conducting business across state lines to at least be familiar with the transaction limits in states where their customers reside.
- Amazon tax or online sales tax refer to statutory sales limits set by states that require foreign agent qualification.
- If you meet or exceed statutory limits in your state, you are considered to have an “economic nexus” there and thus have tax responsibility.
- This definition of “economic nexus” (aka click thru nexus) was solidified in the South Dakota v. Wayfair case of 2018.
- Most states have Amazon laws in their tax code.
- California’s threshold is $500,000 per year in gross revenue on the previous or current calendar year’s sales.
Running a remote team? Hiring full-time employees in multiple US states? Chances are your startup will need to register your Delaware corporation to do business as a foreign corporation.
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