Sales Tax Nexus for Dropshippers: Navigating Wayfair and Economic Thresholds

10 mins read

For dropshipping businesses that sell products to customers across multiple U.S. states, understanding sales tax nexus and compliance requirements is crucial yet complicated in the post-Wayfair era. The Supreme Court’s landmark 2018 decision in South Dakota v. Wayfair, Inc. overturned longstanding rules that required a physical presence in a state to trigger sales tax collection obligations.

Now, states are free to impose sales tax compliance requirements on out-of-state sellers based on economic nexus rather than physical presence. This has significant implications for ecommerce businesses like dropshippers, who must navigate a complex patchwork of new economic nexus laws and sales tax compliance obligations.


What is Sales Tax Nexus?

Sales tax nexus refers to the threshold of economic connections that must be met for a business to be obligated to register, collect, report, and remit state sales tax in that jurisdiction. This establishes a taxable presence or “nexus” that legally mandates sales tax responsibilities.

Before Wayfair, sales tax nexus was determined by physical presence based on factors like having retail stores, offices, employees, or inventory warehoused within a state. The Supreme Court’s 1992 Quill Corp. v. North Dakota ruling established physical presence as the standard for requiring remote sellers to collect sales tax.

How Wayfair Changed the Nexus Landscape

The rise of ecommerce exposed the limitations of the physical presence rule, as states were unable to collect sales tax from large remote sellers. In South Dakota v. Wayfair, the Supreme Court overturned Quill and ruled that physical presence was no longer required to create sales tax nexus.

States can now adopt their own economic nexus thresholds that obligate out-of-state sellers to collect and remit sales tax based on sales or transactions volume rather than physical presence. This was a monumental change for online businesses, as economic nexus provisions significantly expand sales tax compliance duties.

State Economic Nexus Thresholds Post-Wayfair

In the wake of the Supreme Court’s Wayfair decision, states have rushed to impose their own economic nexus standards. These laws typically establish bright-line thresholds based on dollar amounts of gross sales or total transaction volumes.

For example:

  • $100,000 in gross annual sales
  • 200 or more separate transactions
  • Certain volume of sales into the state

If an out-of-state seller exceeds the economic nexus thresholds set by a state in any given year, they will have established a sales tax nexus and be required to collect, remit, and file sales tax returns in that state going forward.

Navigating the Nexus Patchwork as a Dropshipper

For multistate dropshipping businesses, the explosion of different state economic nexus provisions in the post-Wayfair landscape makes compliance extremely complicated. Nexus may be triggered in some states but not others based on sales volume fluctuations.

Carefully tracking sales thresholds across states and monitoring new nexus laws is crucial. Over a dozen states have enacted economic nexus laws with more in development. States also vary in their approaches to retroactive enforcement after exceeding thresholds.

Strategies for Managing Nexus Exposure as a Dropshipper

Determining where and when your dropshipping business establishes sales tax nexus is just the first step. Minimizing nexus exposure by strategically staying under state thresholds may be an option initially but becomes difficult as sales grow.

There are some potential strategies dropshippers can consider:

Temporarily Restrict Sales Volume

Capping sales at just below nexus thresholds in select states may provide short-term relief while you build compliance processes. Use analytics to monitor sales by state.

Review Exemption Eligibility

Some states provide exemptions for wholesale transactions or small sellers. Analyze if any exceptions apply to your business.

Focus on High-Population States First

Prioritize building sales tax capabilities in the most populous states where the greatest revenue exposure lies.

Consider Business Entity Restructuring

Establishing separate legal entities to segment nexus may be an option, but careful planning is required.

Outsource Handling of Registrations

You can work with specialized sales tax providers to manage registrations as nexus is triggered.

Automate Sales Tax Systems

Invest in automated software to simplify otherwise complex collection, remittance, and reporting across states.

Economic Nexus Considerations by State

While a comprehensive analysis of all state nexus laws is beyond this article’s scope, let’s examine some top states’ economic nexus provisions that dropshippers must understand:


  • $500,000 in annual gross California sales
  • Actively engaging in soliciting sales, e.g. referrals, promo codes


  • $500,000 in gross annual sales
  • No minimum transaction threshold

New York

  • $500,000 in sales AND 100 or more transactions
  • Applies retroactively for prior sales if exceeded


  • $100,000 in sales OR 200 transactions
  • No retroactive enforcement before registration


  • $10,000 in gross PA sales from > 200 transactions
  • Exemptions for transactions under $5,000


The era of physical presence nexus has been replaced by a growing patchwork of state economic nexus laws after the Supreme Court’s Wayfair ruling. For multistate dropshipping enterprises, understanding nexus triggering thresholds and actively managing compliance obligations across states is now a business imperative.

Navigating the complexities of sales tax nexus exposure will only become more challenging as additional states enact and amend economic thresholds. Investing in capabilities to track, report, and remit sales tax properly based on economic nexus is essential to scale a dropshipping business.

Careful analysis of nexus laws, focusing first on populous states, and leveraging automation can help dropshippers adapt. But managing sales tax compliance amid the uncertain post-Wayfair landscape will remain an evolving challenge for ecommerce.

Frequently Asked Questions

What determines sales tax nexus for my business?

Nexus refers to the amount of economic connections that obligate a business to collect and remit sales tax in a particular state. Previously, nexus was established through physical presence factors like having retail stores, offices, employees, or inventory in a state. However, the Supreme Court’s Wayfair decision now allows states to impose nexus based on exceeding economic thresholds tied to sales revenue or transaction volume rather than requiring physical presence. Each state sets its own economic nexus standards that remote sellers must be aware of.

Do I have to register in every state where I have nexus?

Yes, if your business exceeds the economic nexus thresholds set forth in a state’s laws and regulations, you are required to register with that state’s taxing authority to collect, report, and remit the appropriate sales tax on any taxable sales you make into that state. You cannot legally ignore nexus obligations just because complying in multiple states creates administrative burdens. Understanding registration requirements in each state is crucial for dropshippers with multistate nexus.

How do I know if I have triggered nexus in a state?

Carefully track and analyze your total sales and transaction volumes by state, then compare those annual totals to the economic nexus thresholds established in each state. For example, if you hit $100,000 in gross California sales, you likely exceed California’s nexus threshold. You also need to closely monitor new nexus laws and regulations, as more states are enacting economic thresholds each year. Have a system to ensure you are aware of new nexus obligations as they emerge.

Can I avoid nexus by forming separate legal entities?

Some large multistate retailers attempt to isolate nexus exposure by segmenting their operations into distinct legal entities in different states or regions. However, the rules around “entity isolation” strategies are complex and risks can include triggering nexus for the other entities. The regulations vary by state, so while this tactic may seem attractive, you should seek advice from a sales tax professional before attempting to structure your business model this way.

What sales tax rate do I charge on dropshipped orders?

You must charge and remit the sales tax rate applicable to the destination where the customer receives the dropshipped order. Sales tax rates can vary widely across counties and cities even within the same state. Properly programming your shopping carts and order management systems to determine the delivery jurisdiction and charge the associated rate is crucial to getting this right. Relying on origin-based rates will result in compliance problems.

Can I still qualify for small seller exceptions?

Some states do provide exemptions from sales tax registration and collection requirements for businesses under certain small annual sales volumes. However, you should carefully review eligibility for any “small seller” exceptions, as these provisions are not universal and each state sets its own monetary threshold. You generally cannot presume you won’t have nexus simply by being a small business, but certain states do offer exemptions that can provide temporary relief if you qualify.

What happens if I don’t register after exceeding thresholds?

If your business fails to register for sales tax collection and remittance after exceeding a state’s economic nexus thresholds, that state can come back and lawfully assess retroactive tax liabilities on you for the prior period that you should have been registered and compliant but were not. Any uncollected sales tax you owe would also be subject to penalties, fees, and interest if the state conducts a nexus audit. This makes compliance upon reaching nexus critical.

How long do I have to register after exceeding nexus thresholds?

The grace period for registration after exceeding economic nexus thresholds varies by state. Some provide 30-60 days, while others mandate registration by the end of the month after you surpass the nexus standard. Do not delay registration and compliance after nexus is triggered.

Can I collect tax but not remit it?

No, this practice known as “trashing the tax” is illegal. You must timely remit any sales tax collected to the appropriate state tax authority after registering. Failure to remit tax can result in tax evasion penalties.

Should I register in states where I fall below the thresholds?

If you are below a state’s economic nexus standards and have no physical presence, you generally do not need to register and collect sales tax in that state. However, volunteers sellers can choose to register even without nexus.

Can online marketplaces like Amazon or eBay create nexus?

Yes, selling through large online marketplaces can potentially create sales tax nexus even if you have no other presence in a state. Review each marketplace’s policies carefully for thresholds.

Are there any states without economic nexus laws?

Currently, there are still a handful of states that rely solely on physical presence to determine nexus and have not enacted post-Wayfair economic thresholds, but this list is shrinking each year.

Can I request an extension if I miss a sales tax filing deadline?

Some states permit extensions or grace periods for filing if you submit a request in advance of the deadline. However, this does not apply to remittance of taxes owed – you must still make payments for any collected tax on time.

What records do I need to keep for sales tax purposes?

You must retain detailed records that support the tax returns filed and sales tax collected for a minimum of 4-5 years in most states. Records should include invoices, bills of lading, and other proofs of sales along with books of all business transactions.

How do I manage sales tax holidays?

Many states have temporary sales tax holidays, usually lasting a weekend. You must configure your shopping carts and systems to automatically exempt qualifying purchases during the precise holiday window then revert back to collecting tax after it ends.

Can sales tax nexus create income tax nexus too?

Yes, in many states establishing sales tax nexus via economic thresholds can also trigger state income tax filing obligations. The nexus standards for income tax may differ, so review each state’s rules.

Are there exemptions for inventory stored at Amazon FBA warehouses?

Storing inventory at Amazon warehouses alone typically doesn’t create nexus. However, increased integration with FBA services like commingling inventory could potentially create physical nexus.

Can I collect tax on shipping and handling charges?

The rules on taxing shipping vary widely by state. Some fully exempt shipping costs while others tax the full charges. Ensure you know the destination state’s rules to comply.

How do I validate a resale or exemption certificate?

States typically provide resources to lookup validation details of exemption certificates issued by authorized resellers or exempt entities. Following validation procedures is important to avoid liability.

Can sales tax be passed back to dropship suppliers?

For true dropshipping arrangements, the supplier invoices without sales tax. However, suppliers may agree to allow sales tax backup for dropship orders as a service to facilitate compliance.

What options do I have for managing multistate sales tax compliance?

Managing frequent multistate sales tax filings, payments, and ongoing compliance is extremely burdensome without automation. You have a few options: 1) Utilize an automated sales tax software solution to simplify everything. 2) Hire an accountant or bookkeeper experienced in multistate tax. 3) Outsource to a sales tax provider service that can handle the filings and payments. 4) If your volumes are low, you may be able to manually use each state’s website, but this won’t scale.

What steps should I take if I receive a sales tax audit notice?

Don’t panic if your business receives an audit notice. First, contact the auditor to learn the scope, timeline, and required steps. Ask for specifics on the types of records, documents, and data they will want to review. Consult your tax professional to understand your potential exposure and options before providing any information. Organize everything thoroughly and retain legal counsel if needed. Cooperate fully and answer all questions transparently, but don’t overshare.

Can sales tax nexus apply retroactively?

Unfortunately yes, a state can retroactively impose sales tax compliance obligations if you exceeded economic nexus thresholds in prior years but failed to register and remit taxes at the time. The lookback period varies – some states go back just 1 year while a few may look back further. This retroactive liability, including interest and penalties, is why prompt registration after exceeding thresholds is so important.

What are some common nexus pitfalls to avoid?

Don’t assume small amounts of sales into a state are safe – even thousands in sales can trigger thresholds now. Ensure all sales channels are aggregated in nexus analysis. Don’t waste time restricting sales if already over thresholds, just register and comply. Collect accurate delivery addresses, don’t rely on billing zip codes. Never “trash” the tax and absorb it yourself. Stay up to date on new nexus laws and guidance.

Are there any ways to reduce or limit nexus exposure?

Some options like forming separate entities, limiting sales, or restricting order volumes can temporarily minimize nexus but become difficult long-term. Focus instead on automating compliance where nexus exists. Optimize product sourcing and relationships with suppliers to avoid inventory or operations establishing physical nexus. Stay vigilant on nexus-creating activities within marketplaces.

What sales tax filing models exist in the U.S.?

The most common models are origin-based and destination-based filing. Origin-based means filing in the state where the seller is located. Destination-based means filing in the buyer’s state. After Wayfair, most states require destination-based filing for remote sellers.

How do I manage tax calculation for bundled products?

Bundled products create tax complexities. The rules vary on whether to tax the full bundled price or allocate the price across items to apply the appropriate rates. Carefully follow guidelines for handling bundled products in the destination jurisdiction.

Can using Fulfillment by Amazon (FBA) create sales tax nexus?

Yes, having Amazon fulfill orders from their warehouses can potentially create physical nexus for sellers, even if other nexus thresholds are not met. Review the storage locations of your FBA inventory regularly to understand nexus exposure.

What are the most common errors in sales tax filing?

Some common errors include incorrectly tracking exempt sales, failing to update tax codes for address changes, charging incorrect rates at checkout, not filing returns in new nexus states, and incorrectly treating shipping charges for tax purposes.

Is sales tax assessed on customer discounts or store credits?

Most states exclude customer discounts and manufacturer rebates from the sales tax basis, but store gift cards and credits are typically taxable up to the purchase amount. Promotional discounts generally don’t reduce tax.

Can I rely on geolocation by IP address for identifying tax jurisdictions?

No, IP-based geolocation is inherently unreliable for determining sales tax jurisdictions and rates. You must collect and utilize accurate customer shipping address data to properly calculate destination-based sales tax.

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