Understanding Nexus Rules for E-Commerce Sales Tax
Understanding sales tax requirements and implications can sometimes confuse businesses selling on platforms like Amazon, or other similar marketplace facilitators. Common questions e-commerce sellers ask, such as “Should I collect sales tax?” or “Do I need to register with the state?” involves a two-step analysis. First, is nexus established? If the answer is no, there is no need to collect. If the answer is yes, the next question is whether what you are selling is subject to sales and use tax.
Nexus is the connection or relationship between a business and a state. It determines whether a state can impose tax obligations on your business. With the rise of Amazon’s Fulfillment by Amazon (FBA) program, a service where Amazon stores, packages, and ships products on behalf of sellers, sellers can trigger nexus in states that they weren’t even aware they were connected to. But this raises the question: am I required to register with the state, even if Amazon is collecting on my behalf?
What Is Economic Nexus for Sales Tax Purposes?
Economic nexus is created when a business reaches certain sales or transaction thresholds in a state, even if it has no physical presence established. In other words, if your online store or e-commerce operation surpasses a certain level of sales or number of transactions in a particular state, you may be required to collect and remit sales tax.
Every state sets its own thresholds for triggering economic nexus. Common metrics include:
- Gross Receipts Thresholds: Many states specify a dollar amount in annual sales—if your total revenue in that state exceeds this figure, you’ve established economic nexus.
- Transaction Count Thresholds: Some states also consider the number of individual sales or transactions. Surpassing these limits can trigger a filing obligation, regardless of your total revenue.
For example, New York requires sellers to have $500,000 in annual gross receipts from sales of tangible personal property and at least 100 sales transactions delivered into the state. Other states, such as California and Texas, also set $500,000 as the annual sales threshold. Pennsylvania’s benchmark is $100,000 in gross sales.
Because each jurisdiction’s rules differ, monitoring your metrics on a state-by-state basis will help you stay on top of potential economic nexus triggers that can result in penalties and interest obligations if ignored.
What Is Physical Presence Nexus for Sales Tax Purposes?
Establishment of physical presence nexus, on the other hand, depends on, for example, where you maintain property, operate facilities, or otherwise establish a tangible footprint. In Texas, the Comptroller states that any temporary or permanent location—whether a kiosk, office, distribution center, warehouse, or similar venue—creates a taxable connection for sales tax, so long as it is operated directly or through an agent (like Amazon).
Pennsylvania adopted a comparable position, emphasizing that having property or inventory in the state (such as storing goods in a local fulfillment center) gives rise to sales tax obligations.
On the west coast in California, the Department of Tax and Fee Administration (CDTFA) highlights that retailers with a physical presence, such as in-state offices, inventory storage, or representatives, must register. While the CDTFA commonly references “use tax,” the definition of physical presence remains the same regarding sales tax responsibilities under California’s laws.
Finally, New York clarifies in Tax Bulletin ST-175 (TB-ST-175) that if you maintain a store, office, or warehouse in the state to offer taxable goods or services, you must apply for a Certificate of Authority at least 20 days before starting operations. Whether it’s a storefront, a craft fair booth, or an internet-based business storing inventory in New York, physical presence nexus obligates you to register and collect New York sales tax on taxable transactions.
Does FBA Constitute Physical Presence for Sales Tax Purposes?
Through Amazon’s Fulfillment by Amazon (FBA) program, a seller’s inventory can end up stored in a fulfillment center located in any number of states, often without the seller’s direct involvement in determining where those goods land. In theory, this makes sense, as the obligation to package, ship, and deliver items to prospective buyers falls on the obligation of the FBA center. However, sellers often do not know where their inventory is stored.
In most jurisdictions, simply keeping inventory in a local warehouse is enough to trigger physical presence nexus, obligating the seller to collect and remit sales tax. Of the four commonly referenced states, Texas, Pennsylvania, California, and New York, Pennsylvania has taken the narrowest view of whether FBA alone creates a taxable presence.
In Texas, the Comptroller’s guidance states that any temporary or permanent location, whether a kiosk, office, distribution center, warehouse, or similar venue creates a sales tax obligation if operated directly or through an agent. This language appears covers FBA inventory housed in Texas, meaning most FBA sellers with goods in the state are required to register and collect Texas sales tax.
By contrast, Pennsylvania has become a focal point for FBA-related nexus issues following the Online Merchants Guild case. The state’s Department of Revenue had sent questionnaires to out-of-state online merchants, claiming that storing inventory at a fulfillment center constituted “physical presence.”
However, the court found the Department failed to establish sufficient “minimum contacts” under the U.S. Constitution’s Due Process Clause, reasoning that the sellers did not control where the fulfillment service stored their goods or whether they would be purchased by Pennsylvania customers.
Consequently, the court held that the mere act of Amazon (or another fulfillment service) placing inventory in the state, without a seller’s active involvement, is insufficient to compel the seller to collect and remit Pennsylvania sales tax.
This rationale may also surface in California, which previously took the stance, similar to Pennsylvania’s early approach, that an out-of-state seller with no connections beyond merchandise stored in a fulfillment center is “doing business” in California and must collect sales tax.
While California’s Marketplace Facilitator Act (effective October 1, 2019) alleviated some of these obligations on a forward-looking basis, the California Department of Tax and Fee Administration (CDTFA) continues to enforce its pre-Act position for earlier periods.
Finally, New York's long-standing rule states that any property or business activity within the state, such as storing goods in a warehouse, requires the seller to register for a Certificate of Authority and collect New York sales tax. This approach underlines the broader trend: most states consider FBA inventory to be a substantial presence unless a court, as in Pennsylvania, finds a lack of “purposeful availment” under the Due Process Clause.
If Amazon Is Collecting and Remitting, Do I Still Need to Register for a Sales Tax License?
Marketplace facilitator laws in many states require platforms like Amazon to collect and remit sales tax on behalf of third-party sellers. These laws were designed to simplify compliance for remote sellers and to ensure that states receive the tax revenue they are owed. However, the existence of these laws does not permanently exempt sellers from needing to register or maintain a sales tax license if they have otherwise established nexus in the state.
Sellers with nexus in New York must register for a Certificate of Authority under New York Tax Law § 1134(a)(1), which allows businesses to legally collect and remit sales tax in New York. Even if Amazon facilitates all sales, registration may still be required to comply with resale certificate obligations and facilitate audits. Sellers must apply for a Certificate of Authority through the New York State Business Express portal. Registration must be completed at least 20 days before making taxable sales in the state.
California requires businesses with physical presence nexus, such as inventory in FBA warehouses, to register with the California Department of Tax and Fee Administration (CDTFA) under Revenue and Taxation Code § 6226. Sellers must register online through the CDTFA portal. The application requires details about physical presence, including inventory held in California warehouses and other business activities.
Meanwhile, Texas and other states likewise maintain that once your business meets the physical or economic nexus thresholds, you remain responsible for state registration.
Considering the above scenarios, some states adopt a looser stance toward purely marketplace-based sellers. The Online Merchants Guild case clarified that inventory in an FBA warehouse does not create physical presence nexus for out-of-state sellers in Pennsylvania. As a result, sellers conducting all their sales through Amazon likely do not need to register unless they make non-marketplace sales or engage in other taxable activities. The Pennsylvania Department of Revenue provides an online Business Registration system for sellers with nexus.
Ultimately, each state’s regulations differ, so you must confirm whether storing inventory or meeting economic thresholds triggers a separate registration requirement, even when the marketplace facilitator handles the bulk of your sales tax remittance.
This concept is quite interesting because you as the Amazon seller, today, may only be operating and selling on Amazon. However, tomorrow, you may decide to begin selling widgets on Shopify, a non-marketplace facilitator, where the obligation to collect, remit and administer sales tax is your responsibility. In this scenario, because you established physical presence nexus due to your inventory being stored in Texas with an Amazon FBA center, your first sale on Shopify into the state of Texas will likely trigger a need for collection.
Our recommendation is simple: hire and consult with one of experts today, as a mere oversight into the need for collection of sales tax can trigger a financial obligation directly from your pocket.
Case Study: S&F Corporation and Orthotic Shop Inc. v. Department of Revenue
In Orthotic Shop Inc. v. State Department of Revenue the Washington Court of Appeals addressed the tax liabilities of two out-of-state sellers, Orthotic Shop, Inc., and S&F Corporation, who sold products through Amazon’s Fulfillment by Amazon (FBA) program. The case centered on whether participation in the FBA program created a nexus sufficient to impose Washington’s Business and Occupation (B&O) tax and sales tax obligations.
The audit periods for the sellers differed slightly, with S&F Corporation being audited for sales between March 17, 2011, and March 31, 2016, while Orthotic Shop was audited for the period between December 31, 2013, and March 31, 2018.
Both audits relied on inventory data provided by Amazon’s "Inventory Event Detail" reports, which tracked goods stored and shipped from Amazon warehouses in Washington. Based on this information, the DOR assessed S&F Corporation $231,354, which included retail sales tax, B&O tax, penalties, and interest, and Orthotic Shop $214,242.59, calculated similarly.
The DOR asserted that storing goods in Amazon’s Washington warehouses established a physical presence nexus, requiring the sellers to collect and remit retail sales tax and pay B&O tax. The merchants argued they should only need to collect taxes in their home states and that Amazon, as the consignee, should bear tax responsibility. They also claimed ignorance of the tax implications in Amazon's Business Solutions Agreement, which warned that storing products in fulfillment centers might create tax obligations.
The court rejected the merchants’ arguments, emphasizing that the merchants were clearly identified as sellers on Amazon's website and that inventory storage created sufficient nexus for tax liability. The court also noted that ignorance of tax law doesn't excuse compliance obligations.
Notably, the court pointed to Washington's 2019 marketplace facilitator law, which began requiring Amazon to collect taxes in 2020, as evidence that such collection wasn't legally required of Amazon during the audit period. The court reasoned that if the legislature believed marketplace facilitators were already obligated to collect taxes before 2020, it would not have needed to enact this law.
Ultimately, the court upheld the DOR’s tax assessments, reinforcing that sellers using Amazon’s FBA program must account for potential tax liabilities arising from storing goods in fulfillment centers. The case serves as a reminder that marketplace participation does not absolve sellers of their tax responsibilities, especially in states with aggressive tax enforcement policies.
Questions and Answers – a Summary of Nexus and Sales Tax Rules
Q: Do I need to collect sales tax if I sell only through Amazon?
A: Yes, depending on your sales activity and nexus. Even if Amazon collects sales tax as a marketplace facilitator, you may still need to register in certain states for compliance. Further, you may still be required to collect and remit sales taxes, if you have sales independent of Amazon.
Q: What are the economic nexus thresholds in major states?
A: States like California and Texas have thresholds of $500,000 in annual sales, while Pennsylvania’s threshold is $100,000. Always check state-specific regulations. A major issue is whether states consider gross sales or taxable sales or retail sales in determining economic nexus thresholds.
Q: Does storing inventory in an FBA warehouse trigger nexus?
A: Yes, in a majority of states. However, some states like Pennsylvania have nuanced rules, which you should confirm with a tax expert.
Ensure Compliance with Sales Tax Professionals
Navigating sales tax obligations as an e-commerce seller can quickly become complicated. Whether you’re managing inventory through programs like FBA or determining sales tax registration requirements, compliance is key to avoiding costly penalties and audits.
Our team of experienced sales tax professionals can help you understand your obligations. Don’t leave your business exposed—contact us today to ensure you remain compliant and focus on confidently growing your operations.