State Sales Taxes for Startups 101

State sales taxes - they matter more than ever for startups. Here is what you need to know if your company is selling products or services in multiple states.

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STATE SALES TAXES FOR STARTUPS 101
STATE SALES TAXES FOR STARTUPS 101

State Sales Taxes for Startups 101 - All you need to know

Why do startups need to care about state sales taxes and tax nexus?

Even money losing, early-stage companies may owe state sales taxes. This becomes even more of an issue if your company has remote employees in many states, and as you have a greater number of “transactions” and revenue from various locations.

Map of State Sales Taxes for Startups

The information below is specific to Sales Tax registrations and separate from state registrations. The data on specific state sales tax rates, thresholds and applicability is for illustrative purposes only, and should not be relied on to prepare state tax compliance or sales tax calculations - work with a qualified CPA like Kruze Consulting to comply with state and local sales tax rules.

VC-Backed Startups: Contact us for a free consultation.

State Tax Nexus

What is State Tax Nexus:

  • Tax Nexus describes the relationship between a taxing authority and a business.
  • Tax Nexus must exist before a state’s taxing authority can levy a tax on a business.
  • A business must have a substantial presence in a State before it creates nexus.
  • To determine your business has Tax Nexus in a state:
    • Registering to do business in the state
    • Physical Presence in the form of Employees, Property, or Assets in a state
    • The Supreme Court’s decision in South Dakota vs Wayfair many states enacted economic nexus laws for businesses that generate a material amount of revenue in states even if there is no physical presence in the state!

Tax nexus is the relationship between a taxing authority and a business. The way it goes is a business has to have one before it can be taxed.

So there are a couple of different types of thresholds to establishing a state tax nexus.

The basic idea is you must have a prominent presence in a state. There are a couple of ways for you to check and see if your company has this. The simplest way is just to see if you have a state registration to do business in that particular jurisdiction. The reason for that is when you start conducting business in a state, typically you have to register. The state knows you registered with them; so they are more likely to check on you and make sure you’re filing the right sales tax and tax returns. So that’s the first shortcut.

The more established way is to evaluate whether you have employees, assets, or property in a state. Anyone who’s working in a state will start triggering a state tax nexus.

So for example, if you’re a startup, and you have a W2 employee working in North Carolina, and that W2 employee is renting office space, you are going to start triggering a nexus in North Carolina. That is, that’s a pretty clear cut. It’s a little tougher to determine sometimes if there’s a computer or some very small amount of assets in North Carolina. But, you can pretty much bet that if you have employees in NC, then you are going to have a nexus.

It’s really important to distinguish between employees versus contractors. If they are contractors, and they have their equipment, such as their own laptop, you are not establishing nexus in that state.

Now, in the modern-day, there’s a lot of business conducted over the internet in the form of eCommerce sales, software or SAAS sales, or service sales.

A few years ago, the states realized this and felt like they were missing out. They brought it to the Supreme Court. The case was called Wayfair versus South Dakota, and the Supreme Court ruled in favor of South Dakota. This ruling gave states the ability to tax businesses, even if they didn’t have a physical presence in the state. You can read more on the Supreme Court’s sales tax ruling here.

So all of a sudden, online sales, online software sales, online diagnostic, or some forms of biotech stuff, all of a sudden become taxable if they pass a certain threshold of around $100,000. Of course, this has to be made even more confusing by some states having their sales taxes be based on a different revenue number in that state, or them having a particular number of “transactions” in that state, or a combination of things.

AND, not all states are collecting this type of sales tax. So the sales taxes you owe are really going to be dependent on the specific number of sales, specific states, and the dollar amount of your sales in those locations. It gets confusing fast.

However, if you’re doing business across the United States, and you have some states where you’re getting close to that $100,000 threshold, it’s getting very likely that you have created a tax nexus, and you’ll have to file sales tax returns. You’ll probably also have to file a state tax return.

In closing, the big picture on the tax nexus is that if you’re doing business in a state physically with employees, property, assets, etc. you have most likely triggered the tax nexus. If you’re doing business in the sense that you’re selling a lot of goods or services over $100,000, you have also probably triggered tax nexus.

At what revenue level should startups worry about state sales tax?

At some point your venture capital-backed startup will have to start filing state sales tax. When and how much will be different from state to state. 

In most states the threshold is $100,000 in annual sales, but that can change. Some states have also set the number at $500,000 while others have chosen $250,000. Smaller states tend to have a lower threshold so they are able to pick up more sales tax revenue. 

But typically, most startups are in the danger zone at $100,000. At that point, most startup accountants, like Kruze Consulting, will conduct a sales tax nexus study, which helps you figure out where you have exposure, and when you will need to start filing sales tax.

Also, your revenue level is just one of many factors that will trigger the need to file state sales tax. 

Let’s take a look at the other factors that can trigger state sales tax. 

Transactions can trigger state sales tax

Surprising to some, but the number of transactions your startup does can also trigger state sales tax.

Typically, when a state is looking at transactions, they’re setting the threshold at 200 transactions, which doesn’t seem like a lot. 

Your startup accountant will know which states consider revenue and transactions and which states consider revenue or transactions. 

For some startups that are selling something at a low price point, they may not realize they’ve triggered the state sales tax requirement because they haven’t reached the revenue threshold, but they’ve certainly exceeded that 200 transactions threshold and should be filing.

Marketplace sales can trigger state sales tax

For those startups that are running a marketplace business, it’s important to understand whether the state in which they do business is including marketplace sales. If marketplace sales are included, then business owners are only getting like 5-10% value out of a sale. 

For instance, if a customer buys a $100 item on your marketplace, you may charge a 5-10% fee to facilitate the transaction. If you are responsible for the sales tax on that item, it can eat up the profit margin pretty quickly. 

So it’s important to talk to your startup accountant and be clear on the sales tax rules of the state in which you’re doing business. 

SaaS can trigger state sales tax

Believe it or not, many states do have a SaaS sales tax.

This is a fairly new thing. A few years ago, there were roughly 13 states that taxed SaaS, and now it’s in the 20s. 

More states are looking at different and new types of transactions to tax in order to fill their revenue gaps. SaaS is quickly becoming one of those transactions, especially in bigger states.  Both New York and Texas have implemented a SaaS sales tax. California and Florida have not, yet.

Get a sales tax nexus study

Given the different rules and laws that govern each state, it’s critical to work with your startup accountant and conduct a sales tax nexus study.

The rules are different from state to state, so be sure you understand your tax obligations and what triggers them. 

If you have any questions about startup taxes or want more information on startup accounting, please contact us.

Avalara simplifies complicated startup sales taxes

In the wake of the Supreme Court’s decision in Wayfair v. South Dakota, individual states are now able to tax startups that have a physical presence in their states, as well as startups that sell more than the state’s product or revenue thresholds.

It’s easy to see how this becomes a complex compliance burden to startups. Depending on your sales footprint, you may have to submit tax filings in dozens of states. And every state has different rules and tax thresholds. 

At Kruze Consulting, we often recommend our clients use Avalara, a SaaS tax compliance software solution that can track your sales by state, calculate your tax obligations, and even help you submit payments. Avalara’s robust and comprehensive solution connects with more than 1,000 different systems, and it’s great for startups that need to simplify their state tax compliance process

California Sales Tax Partial Exemption

Some biotech and manufacturing startups can save almost four percent on sales and use tax for qualified purchases in California.


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How does your startup’s state of incorporation affect taxes?

Sometimes startups might consider changing their state of incorporation to take advantage of different tax breaks. This is different than registering to do business in a state where you have tax nexus. For example, sometimes a startup might want to change states to take advantage of the R&D tax credit for another year. However, that doesn’t work, and changing your state of incorporation is not really a good idea.

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Need state sales tax help or just want to leave it up to the experts?

We can help you out and can do a study for you. We will parse this figure out if you have triggered nexus and we can take care of all the forms you need to file. Feel free to contact us to learn more.

Contact us today for a free consultation!

Massachusetts also offers a sales tax emption for startups conducting research and development in the state (or should we say commonwealth). 

Find out if your startup qualifies for the Massachusetts R&D Sales Tax Exemption

Summary of States with Annual Revenue Threshold

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming

Summary of States with a Sales Tax Transaction Threshold

Alaska
Arkansas
Connecticut
District of Columbia
Georgia
Hawaii
Illinois
Indiana
Kentucky
Louisiana
Maine
Maryland
Michigan
Minnesota
Nebraska
Nevada
New Jersey
New York
North Carolina
Ohio
Rhode Island
South Dakota
Utah
Vermont
Virginia
West Virginia
Wyoming

Summary of States with No Sales Tax

Delaware
Montana
New Hampshire
Oregon

Summary of States that include Marketplace Sales in Threshold

California
Connecticut
District of Columbia
Hawaii
Idaho
Iowa
Kansas
Kentucky
Maryland
Michigan
Minnesota
Nebraska
Nevada
New Jersey
New York
North Carolina
Ohio
Pennsylvania
Rhode Island
South Carolina
South Dakota
Texas
Vermont
Washington
West Virginia
Wisconsin

Summary of States that Exclude Marketplace Sales from Threshold

Alabama
Alaska
Arizona
Arkansas
Colorado
Florida
Georgia
Illinois
Indiana
Louisiana
Maine
Massachusetts
Mississippi
New Mexico
North Dakota
Oklahoma
Tennessee
Utah
Virginia
Wyoming

Summary of States that Tax SaaS Transaction

Alabama
Alaska
Arizona
Connecticut
District of Columbia
Hawaii
Iowa
Maine
Maryland
Massachusetts
Mississippi
New Mexico
New York
Ohio
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Washington
West Virginia

Summary of States that Do Not Tax SaaS Transaction

Arkansas
California
Colorado
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Michigan
Minnesota
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
North Carolina
North Dakota
Oklahoma
Oregon
Vermont
Virginia
Wisconsin
Wyoming
State Annual State Revenue Threshold Transaction Threshold Marketplace Sales SaaS Taxability
Alabama (AL) 250,000 No transaction threshold Excluded from threshold Taxable
Alaska (AK) 100,000 200 Excluded from threshold Taxable
Arizona (AZ) 100,000 No transaction threshold Excluded from threshold Taxable
Arkansas (AR) 100,000 200 Excluded from threshold Not Taxable
California (CA) 500,000 No transaction threshold Included in threshold Not Taxable
Colorado (CO) 100,000 No transaction threshold Excluded from threshold Not Taxable
Connecticut (CT) 100,000 200 Included in threshold Taxable
District of Columbia (DC) 100,000 200 Included in threshold Taxable
Delaware (DE) This state does not impose sales tax. N/A N/A No Sales Tax
Florida (FL) 100,000 No transaction threshold Excluded from threshold Not Taxable
Georgia (GA) 100,000 200 Excluded from threshold Not Taxable
Hawaii (HI) 100,000 200 Included in threshold Taxable
Idaho (ID) 100,000 No transaction threshold Included in threshold Not Taxable
Illinois (IL) 100,000 200 Excluded from threshold Not Taxable
Indiana (IN) 100,000 200 Excluded from threshold Not Taxable
Iowa (IA) 100,000 No transaction threshold Included in threshold Taxable
Kansas (KS) 100,000 No transaction threshold Included in threshold Not Taxable
Kentucky (KY) 100,000 200 Included in threshold Not Taxable
Louisiana (LA) 100,000 200 Excluded from threshold Not Taxable
Maine (ME) 100,000 200 Excluded from threshold Taxable
Maryland (MD) 100,000 200 Included in threshold Taxable
Massachusetts (MA) 100,000 No transaction threshold Excluded from threshold Taxable
Michigan (MI) 100,000 200 Included in threshold Not Taxable
Minnesota (MN) 100,000 200 Included in threshold Not Taxable
Mississippi (MS) 250,000 No transaction threshold Excluded from threshold Taxable
Missouri (MO) 100,000 No transaction threshold Only taxable sales included Not Taxable
Montana (MT) This state does not impose sales tax. N/A N/A No Sales Tax
Nebraska (NE) 100,000 200 Included in threshold Not Taxable
Nevada (NV) 100,000 200 Included in threshold Not Taxable
New Hampshire (NH) This state does not impose sales tax. N/A N/A No Sales Tax
New Jersey (NJ) 100,000 200 Included in threshold Not Taxable
New Mexico (NM) 100,000 No transaction threshold Excluded from threshold Taxable
New York (NY) 500,000 100 Included in threshold Taxable
North Carolina (NC) 100,000 200 Included in threshold Not Taxable
North Dakota (ND) 100,000 No transaction threshold Excluded from threshold Not Taxable
Ohio (OH) 100,000 200 Included in threshold Depends on business or personal use
Oklahoma (OK) 100,000 No transaction threshold Excluded from threshold Not Taxable
Oregon (OR) This state does not impose sales tax. N/A N/A No Sales Tax
Pennsylvania (PA) 100,000 No transaction threshold Included in threshold Taxable
Rhode Island (RI) 100,000 200 Included in threshold Taxable
South Carolina (SC) 100,000 No transaction threshold Included in threshold Taxable
South Dakota (SD) 100,000 200 Included in threshold Taxable
Tennessee (TN) 100,000 No transaction threshold Excluded from threshold Taxable
Texas (TX) 500,000 No transaction threshold Included in threshold Taxable
Utah (UT) 100,000 200 Excluded from threshold Taxable
Vermont (VT) 100,000 200 Included in threshold Not Taxable
Virginia (VA) 100,000 200 Excluded from threshold Not Taxable
Washington (WA) 100,000 No transaction threshold Included in threshold Taxable
West Virginia (WV) 100,000 200 Included in threshold Taxable
Wisconsin (WI) 100,000 No transaction threshold Included in threshold Not Taxable
Wyoming (WY) 100,000 200 Excluded from threshold Not Taxable

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