This is part 2 of a 4-part series. Other articles in the series:
Part 1: “Origin-Based Versus Destination-Based Sales Tax: Which One Applies to Your Business?”
Part 3: “Should Sales Tax be Added to Your Design Services Fees and/or Shipping Charges?”
Part 4: “Sales Tax Implications of Selling Retail Merchandise Versus Selling To-The-Trade Only Products”
©️Dakota Design Company 2017-2025 | All rights reserved. This content may not be reproduced, distributed, or used without permission. This post was human written by Dakota Design Company and evaluated by CVW Accounting.
Sales tax is often a topic that prompts questions among interior designers. And we don’t blame you. No business owner wants to get it wrong and risk tax audits and/or penalties.
For an overview of the basics of re-selling and related sales tax, see this blog post. And to dig into the particular sales tax rates you need to charge your in-state clients, read here.
Another complex topic that needs to be tackled is how and when to tax out-of-state clients and purchasers.
A few situations may apply:
01 | A design business owner may have an e-client they are designing for, and the project may involve the sale of products and materials that are shipped to that client’s location in a different state.
02 | Or, a designer may operate a business near a state border and have clients that live in an adjoining state.
Whenever a business owner is selling to a consumer in another state, the business owner is considered a remote seller, and a few questions are relevant:
- Have I established Nexus in a particular state?
- Does sales tax need to be charged to my out-of-state client/purchaser?
- Do I need to get a sales tax permit in another state, if I have clients in that state?
AND
- What rate of tax is appropriate for this remote purchaser in a different state, in a different sales tax jurisdiction, and with a different state sales tax rate?
We will try to answer all of those questions here.
What is Sales Tax Nexus?
The overriding answer to the questions above is:
Yes, you need to collect sales tax from customers in any state where your business has sales tax NEXUS provided you reach that state’s NEXUS threshold.
What is nexus?
Nexus is a link or connection with a state. If the minimum threshold of nexus activity exists, a seller DOES need to charge and collect that state’s sales taxes from buyers in that state, and remit taxes collected to that state’s Department of Revenue. If the minimum threshold of nexus activity does NOT exist—the seller has no connection with that state—that seller does NOT need to charge and collect sales tax from buyers in that state.
How can a seller determine if they have hit the minimum nexus threshold in another state? There is both PHYSICAL NEXUS and ECONOMIC NEXUS.
Physical nexus means a business has a physical presence in a state: they have an office, studio, warehouse, or some other brick-and-mortar space. As an interior designer, you have a physical presence in the state where you operate your business. So, yes, you charge and collect sales tax to customers in that same state. We’re all used to that, but may not have been familiar with the term physical nexus.
Economic nexus is a bit more complicated. Economic nexus applies to a state where you do not have physical nexus (meaning you don’t have an office there), but you do business there, because you have clients located in that state. Each state has slightly different economic thresholds for establishing economic nexus. But when (and only when) sales to customers in a different state reach a certain threshold through sales, transactions, or revenue generated, will the seller need to start charging, collecting, and remitting sales tax.
A state’s economic nexus threshold can be either monetary-based (cumulative value of sales made to customers or revenue generated in that state) or transactions-based (quantity of sales transactions made to customers in that state). AND, to add to the complexity, a state may change its thresholds over time. There has been a trend away from transaction-based nexus thresholds in favor of more monetary-based nexus thresholds in recent years.
This chart, from the Sales Tax Institute, summarizes the economic nexus thresholds for each state. See the “More Information” tab for additional links to state resources and additional information on sales tax nexus.
Looking at Some Examples of Economic Nexus per State
So, let’s look at some examples of economic nexus thresholds from a few states.
If you are selling to clients in the state of Michigan (and you yourself don’t have physical nexus in Michigan, that is, those Michigan clients are remote, or out-of-state clients for you because your physical office is in another state), your economic nexus will kick in after you have made $100,000 in cumulative retail sales to clients in Michigan OR after you have had 200 or more separate sales transactions to clients in Michigan, whichever is achieved first in the previous calendar year. Either one of these two threshold options needs to be met for economic nexus to exist.
Some states dictate the previous calendar year as the measurement timeframe to be considered. Other states stipulate a preceding 12-month period. This stipulation can be tricky. If you are making a lot of out-of-state sales to clients in one of these states, you may need to monitor your sales to clients in that state on an ongoing quarterly basis to see whether you have reached the threshold in a preceding 12-month period.
Let’s look at another state. If you are selling to clients in the state of Florida (and you yourself don’t have physical nexus in Florida, that is, those Florida clients are remote clients for you), your economic nexus will kick in after you have made $100,000 in cumulative taxable sales to clients in Florida in the previous calendar year. So, in January, you would assess your dollar sales amount to clients in Florida in the previous calendar year, and if that monetary sales amount exceeded $100,00, you would start charging sales tax to your Florida customers. You would reassess every January. If the previous year’s sales fell below that $100K threshold, you would cease charging sales tax to those Florida clients, because you no longer have economic nexus in Florida.
Let’s look at one more state scenario.
If you are selling to remote (out-of-state) clients in Connecticut, you need to have reached $100,000 in retail sales AND have made at least 200 sales transactions to customers in Connecticut in any 12-month period ending on September 30th before your economic nexus kicks in and you need to start charging, collecting, and remitting Connecticut’s state and local sales tax. You need to have reached both a dollar volume AND a transaction count threshold for economic nexus to kick in.
In summary, if you are selling in a specific state where you have not reached the NEXUS minimum threshold, that is, you do not have physical nexus, and you have not reached economic nexus, you are not required to charge, collect, and remit sales tax in that state UNTIL you reach a certain threshold to clients in that state (in volume or transaction quantity, whichever applies).
What Does an Out-of-State Seller Need to Do When They Have Reached Economic Nexus?
When a seller reaches economic nexus, they must obtain a sales tax permit in that state, and begin charging, collecting, and remitting sales tax to that state for sales made to purchasers in that state. If a business has reached the economic nexus in that state, and does not collect tax on taxable sales, then it can be held liable for the tax amount if audited.
What is the Responsibility of the Out-of-State Purchaser?
However, this is not a bonus for your out-of-state clients. They do not actually get a break from having to pay sales tax on items purchased through you. In actuality, they still need to pay the tax on the purchased items, but as a USE tax instead. In essence, the tax burden falls to them.
Yes, that’s right. You—the seller—have no tax obligation in other states until you reach economic or physical nexus. But state sales tax collectors STILL expect that tax be paid on every sale. So, the buyer (the client) who is making the purchase through you needs to (theoretically) pay tax on the purchase, per the applicable sales tax rate (as long as the item is taxable). But in this case, it is not called SALES tax, it is called USE tax. While sales and use tax refer to the same thing, the difference is how it is accounted for and who is responsible for remitting it to the state.
I say theoretically because, as you can imagine, the remittance of this USE tax does not always happen. And, while a business can be audited for sales tax, sales tax audits do not typically occur at the individual purchaser level. However, both sellers and purchasers need to be aware of their responsibilities to stay in their legal lane regarding tax, and a business audit may trigger a consumer audit. Purchasers who make purchases from out-of-state sellers are theoretically obligated to self-monitor and self-report and pay these Use taxes.
Seller Reporting Requirements in Specific States
A few states have enacted reporting requirements, which apply to remote sellers who have not met nexus thresholds, which dictate a few things:
- A seller cannot advertise or promote to customers that no tax will be due from out-of-state purchases.
- Remote sellers are required to report, on every out-of-state product invoice, that tax was not charged/collected because the seller does not have nexus in that state, but that the purchaser DOES owe Use tax on the transaction.
- At the end of every year, the seller needs to send their out-of-state purchasers a statement of purchase totals, and remind them of their Use tax obligation to their state.
- Depending on the reporting requirements of the state, the seller may also be required to provide the state with a listing of purchasers and purchase totals, so that the state can better ensure the collection of Use tax.
Check this chart, from the Sales Tax Institute, under the heading Reporting Requirements to see whether a state you are selling to has such requirements. If your state does not have a reporting requirement, you as a seller are not required to do the things listed in the bulleted items above.
When Did This All Begin?
If any business owner reading this post feels like, Wait!!! Why didn’t I know about this???, many of the state laws regarding sales tax nexus are fairly recent. A case that was settled by the US Supreme Court in 2018, called South Dakota versus Wayfair, Inc. was what triggered economic nexus requirements for remote sellers. Prior to that, out-of-state e-commerce was allowed to operate pretty much tax-free. Not surprisingly, most states now require that many out-of-state sellers (those exceeding economic nexus) collect sales tax even if that seller does not have a physical presence in the taxing state.
What is the Appropriate Sales Tax Rate for Remote Sales, After Nexus is Met?
All out-of-state sales taxes to purchasers in another state are computed based on the location of the purchaser. Whatever state, county, city, or local sales taxes apply to that purchaser’s address, is what needs to be charged, collected, and remitted to that state’s Department of Revenue by the seller.
And, if the seller does not have nexus, and therefore does not charge/collect/remit that sales tax, the purchaser is obligated to pay the Use tax based on the applicable sales tax rate in their tax jurisdiction.
Most states’ Department of Revenue websites will include a Sales Tax Calculator, where the purchaser’s zip code or address can be input to find out the appropriate rates for state, county, city, and/or local sales tax.
Disclaimer: We are not accountants or tax attorneys, but it is for informational purposes only and should not be considered legal or financial advice. Please consult with an accountant or tax professional for guidance on your specific situation. You can also contact the support team at your state’s Department of Revenue. Each state’s DOR web page should include an email address and toll-free phone number (under Contact Us) for you to reach out with specific questions about business sales tax in your area.
Sources used:
- Sales Tax Institute. (2024, October 9). Economic Nexus State by State Chart. https://www.salestaxinstitute.com/resources/economic-nexus-state-guide
- Sales Tax Institute. (2023, January 1). Remote Seller Nexus Chart.
https://www.salestaxinstitute.com/resources/remote-seller-nexus-chart - Wikipedia. (n.d.). South Dakota v. Wayfair, Inc. https://en.wikipedia.org/wiki/South_Dakota_v._Wayfair%2C_Inc.