Pragmatic Not-Legal Advice for Early Stage Startups on Sales & Use Tax and Starting to Sell in the US
Yes, you can start selling everywhere (in the US) immediately for the most part. Ish.
Disclaimer: I am not a lawyer and this is not legal advice. I could be wrong on some of this stuff. Please feel free to call me out.
So. You’ve finally got your first product together and you’re ready to test the waters by taking some sales around the US. But it turns out there’s this thing called Sales Tax you have to pay to states and sometimes even municipalities!
Do you need to apply for a sales tax permit with all of these states before you can even start selling?
Ask any lawyer or accountant about your sales tax obligations and they’ll rattle off all sorts of crap about Nexus, and “it depends,” and if you want to get a clear answer out of them you’ll need to shell out some dough for a proper answer unique to you.
Well, as of 2023, I’m here to tell you that it’s almost surely fine to start taking sales without registering with all the state entities with a few caveats.
If you have a business presence (employees/offices) in that state, you’ll almost surely qualify for Nexus and will want to at least register for sales tax there
If you’re a fully distributed / remote team. Then maybe ask a lawyer (and maybe expect at best a not-helpful answer and at worst an answer you won’t like). You may (or likely) have Nexus by just having an employee (or even an independent contractor!) operating out of the state. See Nevada, for example.
The flip-side: if your product or service is exempt from sales tax, you may not actually need to register (example: Texas)
This is strictly about sales (and use) tax. Depending on your business you may have other weird licensing requirements.
There’s this other thing called use tax if you don’t collect sales tax, which we’ll get into
You’re still going to want to have a way to track and analyze sales by state (I mean, just exporting sales data and analyzing in a spreadsheet should be fine fine)
So step 1: review the states where you have business ops going. You may or even may not need to register depending on what you’re selling. If you’re early stage, this should be pretty tractable as you presumably won’t have too many employees or states to look into.
OK moving on:
Most (all now?) states have a monetary and/or transaction count sales threshold for meeting nexus requirements (i.e. needing to register with the state and starting to collect, pay, and report sales tax). If you’re a nascent startup, you almost surely will not meet these thresholds in your first few months of selling unless you’re a money-making crazy unicorn.
Avalara has a nice little tool for reviewing Nexus thresholds: https://www.avalara.com/us/en/learn/nexus/sales-tax-risk-assessment.html (just check all of the states off).
For most states, unless you have $100,000+ in sales or 200+ transactions, you don’t have Nexus. A few have some lower limits.
Very important note from Sales Tax Institute:
“There is no sales tax obligation for the retailer if it has not established nexus in a state. However, if a retailer does collect sales tax in a state in which it is not registered to do so, that constitutes an illegal activity. Do not collect sales tax for sales in states where you have not registered to collect sales tax or established nexus.”
DO NOT SET UP SALES TAX COLLECTION FOR STATES YOU ARE NOT REGISTERED IN EVEN IF YOU END UP MAKING SALES IN THAT SATE.
Some types of businesses/services (like consulting) can be exempt from charging sales tax depending on the state, but despite this—some states may still count your income/transactions from this towards having Nexus and make you register when the threshold is hit.
Bottom line: if you’re a nascent startup and just starting to take sales, you likely don’t have Nexus anywhere other than where you’re operating.
Wow, so I can make thousands of dollars in sales in these states without needing to charge customers sales tax!?
Hold your horses there, sport. It sounds too good to be true, and it somewhat is. There’s this other thing called Use Tax, which we need to discuss, and it’s also btw not OK (illegal in some cases?) to advertise you’re not collecting sales tax.
Another important note from Sales Tax Institute:
“A few states have passed notice and reporting requirements legislation, which are responsibilities you might have if you make sales into a state but don’t meet any nexus requirements. Notice and reporting requirements say that you cannot advertise, promote, or otherwise communicate that no tax is due simply because you do not have nexus in the state.”
If you don’t have Nexus, some states still have various requirements like:
You must send them a list of customers from that state who made purchases
You must notify the customers of those states that they may have use tax owed to the state
So. Use tax. Use tax is like sales tax, but where the customer pays the government instead of your company collecting sales tax and paying the government. Like sales tax, it’s quite possible you may not have a use tax obligation depending on the type of service you’re providing.
When is the last time you’ve personally gotten hit with a use tax obligation? For most people, myself included, probably never. I’d probably be surprised (and not in a good way) if I did. From a UX-perspective, I’d like to avoid having customers be required to deal with use tax if at all possible.
The good news here is that in most cases there’s still a threshold, albeit lower (like $10k in some cases, or if an individual customer generates more than $500 in sales in a year). Avalara has a pretty good overview, though they have a disclaimer that they don’t guarantee the accuracy of the information and it being up-to-date (and in some cases, I’ve found it not to be).
Per Avalara’s article, there are a few states you’ll need to be aware of out the gate:
Colorado - does not (appear to) have a threshold and has immediate reporting requirements. Sadly, this seems to be accurate based on my own separate review.
Hawaii - If you’re a “marketplace facilitator”
Oklahoma - does not (appear to) have a threshold and has immediate reporting requirements at first glance, BUT on a deeper look it does according to this government FAQ (< $100k in-state sales qualify for a small business exemption).
Puerto Rico - does not (appear to) have a threshold and has immediate reporting requirements
Nevada - Nevada has a bunch of stuff buried here. Sadly, I cannot find a threshold on my own review.
My (not-legal advice) take: just get selling
My take: get selling and don’t worry about nexus other than places where you have obvious business operations. But still be responsible and try to be compliant. As early sales role in for each new state:
Take a gander at their reporting and use-tax requirements and thresholds
Understand if your type of business is exempt from sales and use tax (though even if it is exempt, it may still require reporting!)
If it turns out customers are required to be notified of potential use tax liability, just do the manual labor and immediately send them a nice templated follow-up email about this.
To consider: for states that require dealing with use tax reporting out the gate if your business is non-exempt, I might just consider the hassle of registering to remit sales tax if they allow it.
Once I have some very early sales and happy customers, then it’s worth the headache to start tracking and analyzing your sales for meeting Nexus and Use Tax thresholds—and likely invest in sales tax automation software.
If given the option, I’d rather register with states to collect and remit sales tax than deal with the unsavory headache of notifying customers about use tax obligations and making reports about it to the state.
Tracking Sales Tax and Nexus
Super early on you can do this manually. Most e-commerce platforms/payment providers will log your sales, which you can then export and analyze later: Shopify, Stripe, WooCommerce etc.
Once things start to get a bit unruly, you’ll have a good problem on your hands. You’ll probably have enough revenue to start paying a proper bookkeeper/controller and get some sales tax management software like Avalara and Taxjar integrated.
With a little less automation and a little more legwork from your controller/bookkeeper, Stripe’s internal sales tax system can get the job done as well.