246: Everything You Need To Know About Sales Tax With Martina Chavez Of Avalara

Podcast: Download (Duration: 37:53 — 43.6MB)

Before June 21, 2018, you only owed sales tax in states where you had a physical presence. The Supreme Court’s decision in South Dakota v. Wayfair changed that, allowing states to require sales tax collection from out-of-state sellers with no physical presence at all.

Martina Chavez works in sales tax compliance at Avalara, a global sales tax compliance software company, and has spent four years working specifically with Amazon and marketplace sellers. I get asked about sales tax roughly three times a week, so I brought her on to clear it up.

Below is what economic nexus means, why Amazon collecting tax does not release you from filing, the threshold triggers to watch, and what to do if a state sends you a notice.

Key takeaways

• Economic nexus means a state can require sales tax collection based on your sales volume there, with no physical presence required.
• South Dakota’s threshold was $100,000 in sales or 200 separate transactions. Each state sets its own.
• In marketplace facilitator states, Amazon remits the tax and you are still obligated to register and file.
• Registering in a state is effectively permanent. Falling below the threshold next year does not undo it.
• Physical presence nexus still applies on top of economic nexus. FBA inventory in a state creates it.
• You do not track individual tax rates yourself. Amazon, BigCommerce, and Shopify all handle calculation.
• Never ignore a state notice. California, Texas, and Florida are particularly aggressive.
• One seller faced over $1 million to get compliant on back taxes, which ended the business.

What nexus means and why it changed in 2018

Nexus is the term states use to identify who is obligated to collect sales tax, and it traditionally meant physical presence. Warehouses, employees living in the state, your headquarters, even attending trade shows can all trigger it.

South Dakota argued to the Supreme Court that Wayfair owed sales tax on sales into the state despite having none of those. The Court ruled in South Dakota’s favor on June 21, 2018, establishing economic nexus as law.

Other states adopted the same approach quickly. California and New York followed, and those two matter most because nearly everyone sells into them.

The distinction worth holding onto is that sales tax is separate from income tax. Everything here concerns sales tax only.

How threshold triggers work

Economic nexus does not apply to every sale. States set thresholds, and South Dakota’s original version was $100,000 in sales or 200 or more separate transactions.

Two hundred transactions at $10 each triggers the obligation the same way one large order would. Once you cross it, you must register and begin collecting going forward, whether you sell on Amazon, Shopify, BigCommerce, or anywhere else.

Registration is close to permanent. You are telling the state you will collect sales tax for the life of your business, so dropping below the threshold the following year does not reverse it.

Each state sets different thresholds, and Avalara maintains a current map of which states have enacted economic nexus, which have affiliate or click-through nexus, and where the thresholds sit.

Does Amazon handle your sales tax?

Amazon provides a free calculation engine for sellers, and the seller remains responsible for determining where tax must be collected. Amazon calculates; you decide where it applies.

In marketplace facilitator states, Washington being an early example, the state requires Amazon to remit the collected tax. The seller is still obligated to register and file.

That distinction causes real confusion. Amazon sending the money does not mean you are off the hook, because the filing obligation stays with you.

Martina’s view is that filing is the harder half anyway. You have to aggregate your data and know exactly how much you collected in each state and which jurisdiction it belongs to, then submit that documentation.

Once you have your state ID number, you enter it in Seller Central and Amazon handles calculation automatically from there.

You do not need to track individual tax rates

There are over 600 taxing jurisdictions in the United States, and California alone has many different rates by region. You are not expected to track them manually.

Amazon handles calculation, including jurisdiction changes and current rates. Avalara’s calculation engine is embedded free in both BigCommerce and Shopify, and Avalara integrates with more than 500 ecommerce and accounting platforms.

Calculation is the solved part of this problem. Determining your obligations is where the work is.

Do you need to register in all 50 states?

No. Five states have no statewide sales tax at all, so those never apply regardless of your volume.

For a new seller, start with your home state, since that is a clear obligation. Then track where your FBA inventory physically sits, because physical presence rules did not disappear when economic nexus arrived. Economic nexus is a layer on top.

If your inventory lives in California, Texas, and Florida, register in those three and begin collecting.

Then monitor revenue by state against each state’s economic nexus threshold. Selling $25,000 into South Dakota across 100 units means no registration required, because you have not triggered anything.

New sellers typically have inventory in only two or three states to begin with.

The tracking burden is real

Tracking varying thresholds across dozens of states is genuinely burdensome for a small business, and Martina is candid that states have not made this easy.

Her answer is software, and she acknowledges her own bias as an Avalara employee. Other options exist.

Her explanation of why states did this: they historically relied on sales tax from brick-and-mortar retail to fund roads, traffic lights, police, and fire services, and that revenue declined as buying moved online. Sensible for states, hard on business owners.

What to do if you receive a state sales tax notice

Do not ignore it. California is aggressive and will keep pursuing you, and the consequences can extend past your business to personal credit and liens affecting your family.

Talk to a state and local tax expert, specifically an accountant with genuine expertise in state and local taxes rather than general accounting.

The questions they will work through are whether you register and start collecting today, or whether you owe back taxes for prior years, and if so whether a voluntary disclosure agreement with the state makes sense.

Getting a letter means the state already believes you have an obligation. They employ people specifically to identify sellers like you, and they are telling you they know.

What happens with years of back taxes

Martina describes a seller who would have owed over $1 million to become compliant, even with a voluntary disclosure agreement reducing penalties and interest. That amount, due as a lump sum, ended the business.

That scenario required many years of high-volume selling across many states while never collecting or remitting anything. She emphasizes it is rare rather than typical.

Most online sellers do not have that volume, so a voluntary disclosure agreement produces a manageable number. For many, the only real cost is registering and collecting going forward.

The common professional advice she hears is that starting collection from now on is often acceptable, because states primarily want the money flowing. Larger situations have nuances requiring an expert.

The compliance decision is a business decision

Martina describes two camps among sellers she talks to.

Some get compliant and use software, preferring that to the risk of a state like California pursuing them and their home.

Others decline to act until a state comes after them, reasoning that their volume is low enough that any eventual penalty would not seriously harm the business.

She frames it as weighing risk: what compliance costs in time, resources, and money against the exposure of staying out of it. Registration costs money up front and takes time, and afterward it is a pass-through, since sales tax is the customer’s money moving through you rather than your own.

Her caveat, stated directly, is that she is not a tax advisor.

Beyond California, she names Texas, Florida, and Colorado as similarly aggressive.

Her recommendation for anyone who has been selling for years while collecting only in their home state is straightforward: if you care about the business continuing, get professional advice on your actual obligations.

You can find Avalara at avalara.com, which maintains current maps of state economic nexus rules and thresholds.

Frequently asked questions

What is economic nexus?

Economic nexus lets a state require you to collect sales tax based purely on your sales volume into that state, with no physical presence required. It was established by the Supreme Court’s June 2018 ruling in South Dakota v. Wayfair.

What was the sales tax threshold in South Dakota v. Wayfair?

$100,000 in sales or 200 or more separate transactions into the state. Each state that has since adopted economic nexus sets its own thresholds, so they vary.

If Amazon collects sales tax, do you still have to file?

Yes. In marketplace facilitator states Amazon remits the money, and the seller remains obligated to register with the state and file returns showing what was collected.

Do you have to register for sales tax in every state?

No. Five states have no statewide sales tax, and in the rest you only register where you have physical presence, such as FBA inventory, or where you have crossed that state’s economic nexus threshold.

Does registering for sales tax in a state expire?

Effectively no. Registering tells the state you will collect for the life of your business, so falling below the threshold in a later year does not remove the obligation.

Do you have to track individual sales tax rates yourself?

No. Amazon calculates tax automatically once you enter your state registration number, and Avalara’s calculation engine is embedded free in both BigCommerce and Shopify.

What should you do if a state sends you a sales tax notice?

Do not ignore it, and consult an accountant with specific state and local tax expertise. A notice means the state already believes you have an obligation, and aggressive states like California can pursue liens affecting personal credit.

What is a voluntary disclosure agreement?

An arrangement with a state to come forward about uncollected back taxes in exchange for reduced penalties and interest. The reduced amount still comes due as a lump sum, which in extreme cases has been large enough to end a business.