Ecommerce Sales Tax and Nexus Basics for US and Canadian Sellers

This guide provides general technical information. It is not legal, medical, tax or financial advice. Confirm requirements with a qualified adviser for your jurisdiction and implementation.

Why this catches sellers out

For years, online sellers only had to collect sales tax where they had a physical presence. That changed in the US after a 2018 Supreme Court decision allowed states to require collection based on economic activity. Today a small store shipping across the country may owe tax in many states without ever setting foot there. Canada has its own system of goods and services tax, harmonized sales tax and provincial taxes.

This article is general information, not tax advice. Rules and thresholds change, so confirm with a qualified tax professional.

United States basics

What is nexus?

Nexus is a sufficient connection between a seller and a state to require collecting and remitting that state’s sales tax. There are two broad types:

• Physical nexus. Offices, warehouses, inventory (including goods stored in a fulfillment center), employees, or sometimes contractors and sales representatives in the state.
• Economic nexus. Sales or transaction volume into a state above a threshold. Many states use a threshold based on sales and, in some cases, a number of transactions, but they differ, and some have removed the transaction count. Check each state’s current rules.

Marketplace facilitators

Most states require marketplaces such as large online platforms to collect tax on third-party sellers’ behalf. Your own website sales still count toward your obligations, and marketplace sales may count toward thresholds in some states.

Rates and sourcing

US sales tax has state, county, city and special district components, and rules differ on whether tax is based on the seller’s location or the buyer’s. Product taxability varies too. Clothing, food, digital goods and software are treated differently by state.

Canada basics

• GST/HST. The federal goods and services tax applies nationwide, and some provinces harmonize their tax with it as HST. Rates depend on the province of delivery.
• PST and QST. Some provinces charge separate provincial sales taxes, with their own registration rules.
• Small supplier threshold. Businesses under a revenue threshold may not need to register for GST/HST, but foreign sellers and digital supply rules differ. Check the current thresholds.
• Cross-border sellers. Non-resident sellers selling to Canadian consumers may need to register under simplified rules, depending on the type of sale.

Steps to stay compliant

• Map your sales. Export orders by destination, and total sales and transactions by state or province.
• Identify exposure. Compare against thresholds, and consider physical presence from inventory, staff and fulfillment partners.
• Register where required. Obtain permits or accounts before collecting. Collecting without registration can be unlawful.
• Configure tax collection. Set up your platform to collect the right rates, based on destination and product category.
• File and remit on schedule. Returns may be monthly, quarterly or annual depending on volume.
• Handle exemptions. Resellers, nonprofits and other exempt buyers need valid certificates.
• Keep records. Retain invoices, exemption certificates and filings.
• Review regularly. Thresholds and rates change.

Use technology

Whatever you choose, test with sample orders to different destinations, including exempt customers and returns.

Common mistakes

• Waiting until a notice arrives.
• Forgetting that inventory in a fulfillment center creates presence.
• Applying one tax rate across a state.
• Not tracking thresholds on a rolling basis.
• Ignoring shipping and handling taxability rules.
• Missing exemption certificates for B2B customers.

Some states allow voluntary disclosure programs that reduce penalties for past non-compliance, so consult a professional if you discover gaps.

FAQ

What is sales tax nexus?

It is a connection between your business and a state or province that creates an obligation to register, collect and remit tax there.

Do I owe sales tax if I sell on a marketplace only?

Marketplace facilitators usually collect tax on your behalf in most states, but your obligations on direct website sales still apply.

Do I charge GST/HST to Canadian customers?

Depending on your status, thresholds and the type of sale, you may need to register and charge it. Confirm with a tax professional.

Can software handle all of this?

Software helps with rate calculation and filing, but you still need to monitor exposure, register and review settings.