Episode 8: Sales Tax, Use Tax & Nexus — What Small Businesses Must Know | Small Biz Matters with Michelle

Sales tax. Use tax. Nexus. Three simple words. One giant headache.

If you are a small business owner—especially if you are selling online, across state lines, or a mix of products and services—these three concepts could be costing you thousands in missed compliance, unexpected liability, or audit penalties.

Here is the thing: most business owners think they understand sales tax. They collect it at the register, file it quarterly, and move on. But the moment they start selling in multiple states, or they get a notice from a state they have never even shipped to, everything changes.

A few months ago, I met a boutique owner—let's call her Lisa. She was doing great online, tons of orders, a loyal customer base, and she felt confident. Then she got a notice from another state asking why she was not collecting their sales tax. She panicked. She had no idea she needed to. And she is not alone.

If you have ever wondered: “Do I need to charge sales tax?” or “What is economic nexus and why is everyone talking about it?” or “What happens if I get it wrong?”—this article is for you.

What Is Sales Tax? (And What It Is Not)

Sales tax is a consumption tax. It is collected by the seller at the point of sale and remitted to the state. It is not a tax on your business—it is a tax on your customer's purchase. You are the middleman collecting it.

Sales tax applies to:

• Physical goods (inventory, products you sell)
• Digital products (e-books, software, digital downloads)
• Some services (depending on your state and the type of service)

Sales tax does NOT apply to:

• Services in most states (consulting, coaching, accounting—though this varies)
• Wholesale purchases (when you are buying inventory to resell)
• Items shipped to customers outside your sales tax nexus

The key takeaway: if you are selling tangible items or digital products, you almost certainly need to collect sales tax somewhere. The question is: where?

Understanding Nexus: The Game Changer

Nexus is the connection between your business and a state that gives that state the right to require you to collect sales tax. For decades, the rule was simple: you only had to collect sales tax in states where you had a physical presence. Then in 2018, the Supreme Court ruled in South Dakota v. Wayfair. Everything changed.

Physical Nexus

If you have a physical location in a state—a storefront, warehouse, office, or employees—you must collect sales tax there. Period.

Economic Nexus (The New Game)

Even without a physical presence, you may be required to collect sales tax if you meet a state's economic nexus threshold. Most states use:

• $100,000 in sales in the past 12 months, OR
• 200 transactions in the past 12 months

If you hit either threshold, you have economic nexus in that state and must collect sales tax. This is why Lisa got that notice. She was selling on Etsy and Shopify, hitting the economic nexus threshold in multiple states without realizing it.

Use Tax: The Hidden Liability

Use tax is the flip side of sales tax. It is a tax on items you purchase and use in a state where the seller did not collect sales tax.

Here is the scenario: You are a contractor in Georgia. You order supplies from an out-of-state vendor. The vendor does not collect Georgia sales tax because they do not have nexus there. But Georgia still wants its tax revenue. So Georgia requires you to pay use tax on that purchase.

Use tax = sales tax rate × purchase price. It is the same rate as sales tax, but you are the one paying it, not collecting it from a customer.

Most business owners do not even know use tax exists. They think, “I did not pay sales tax, so I am good.” Wrong. You still owe use tax. And states love auditing for it because it is money they know most businesses are not tracking.

Real-World Compliance: What You Actually Need to Do

Step 1: Identify Your Nexus

Where do you have physical nexus? Where do you have economic nexus? Tools like Avalara, TaxJar, and Stripe Tax can automate this calculation for you.

Step 2: Register for Sales Tax Permits

Once you identify your nexus states, register for a sales tax permit in each one. This is not optional. Most states allow online registration and it typically takes one to two weeks.

Step 3: Determine Your Tax Rates

Sales tax rates vary by state, county, and sometimes city. If you are selling online, you need the rate for each customer's shipping address. Tools like Avalara and TaxJar handle this automatically and integrate with Shopify, WooCommerce, Amazon, and other platforms.

Step 4: Charge the Correct Rate

Your point-of-sale system or e-commerce platform should automatically calculate and add the correct rate based on the customer's location. Do not charge a flat rate to everyone.

Step 5: File on Time

Filing frequency varies by state and sales volume: monthly (higher-volume sellers), quarterly, or annually. Missing a deadline results in penalties and interest. Set calendar reminders or use your accounting software to track due dates.

Step 6: Keep Meticulous Records

Keep records of all sales by state, tax collected, use tax paid, and exemption certificates for at least 7 years. States can audit back that far.

Common Pitfalls and How to Avoid Them

Pitfall 1: Selling on Marketplace Platforms

If you sell on Amazon, Etsy, or Walmart Marketplace, the platform may collect sales tax on your behalf. But you still need to verify this and understand what they are collecting and in which states. Do not assume they are handling everything.

Pitfall 2: Bundling Products and Services

Bundling a physical product with a service creates tax complexity. Example: a course (usually not taxable) bundled with a workbook (taxable). Separate your pricing to make tax calculation clear and defensible in an audit.

Pitfall 3: Forgetting About Use Tax

Track what you buy from out-of-state vendors. At tax time, calculate your use tax liability. Some states have a simplified method if your use tax is under a certain amount.

Pitfall 4: Not Updating Nexus as You Grow

Review your nexus annually. As your business grows and you hit economic thresholds in new states, register immediately. Do not wait for a notice.

A Real-World Case Study

A client—let's call him Marcus—runs an online boutique selling handmade jewelry nationwide. He was doing about $250,000 in annual sales and charging sales tax only in Georgia. He thought, “I do not have a physical location in other states, so I do not need to collect tax.”

With $250,000 in sales, Marcus had hit the economic nexus threshold in at least 15 states. When a state auditor noticed his Etsy shop, they sent him a notice. He owed back taxes, penalties, and interest. The bill was over $8,000.

The solution: we identified all states where he had economic nexus, registered for sales tax permits in each, set up TaxJar to automate rate calculations and filing, and built a use tax tracking system for his supply purchases. Going forward, his compliance is automated and he is protected.

Final Thoughts

Sales tax compliance is not optional, and it is not as complicated as it sounds once you have the right systems in place. The businesses that get in trouble are the ones who assume they are fine—until they get a notice.

The good news: with the right tools and a little upfront work, you can automate most of this. You will know exactly where you have nexus, what rates to charge, and when to file. No more guessing. No more surprises.

Ready to get your sales tax compliance sorted? Book a free discovery call with Lighthouse Business & Risk Solutions and let's make sure your business is protected, compliant, and set up to grow without the tax headaches.