Most small business owners understand that having a storefront in a state means collecting that state’s sales tax. What surprises people is that sales tax nexus can follow your business into states where you have no office, no employees, and no inventory. If you ship products, sell online, or serve clients remotely, you may already have obligations you have never filed for.
This is not a big-company problem anymore. The thresholds are low enough that a growing small business can cross them without noticing.
How you end up owing tax in a state you have never visited
Since the Supreme Court’s Wayfair decision, states can require you to collect sales tax based purely on your economic activity there. Most states set the trigger at $100,000 in sales into the state, and some also count 200 separate transactions. Cross either line and you are expected to register, collect, and file.
The tricky part is that the rules are not uniform. States differ on whether the threshold counts gross sales or only taxable sales, whether it looks at the current or prior calendar year, whether marketplace sales count toward it, and how long you have to register once you cross. Selling into ten states can mean ten different answers.
If you sell through a marketplace like Amazon or Etsy, the platform generally collects and remits on your behalf as a marketplace facilitator. That helps, but it does not always remove your own registration obligation, and it does not cover the sales you make directly.
Colorado is one of the hardest states in the country
If you do business in Colorado, this deserves your attention, because the state layer is the easy part.
The state threshold is $100,000 in gross sales into Colorado, which includes both taxable and nontaxable retail sales. If you cross it mid-year, you have a 90 day window before collection is required, and you begin collecting on the first day of the first month starting at least 90 days after you crossed. Cross it in a prior calendar year and you collect starting January 1.
Then there are the home rule municipalities. Colorado has roughly 70 cities that administer and collect their own sales tax independently of the state, each with its own registration, its own rules about what is taxable, and its own filing. The state built the Sales and Use Tax System, known as SUTS, to let you file for the state and participating home rule cities in one place, and about 40 of them participate. The rest still require you to register and file with the city directly.
That is why a Colorado business selling statewide can end up with a dozen separate filing obligations. It is also why “we file our Colorado sales tax” is not the same sentence as “we are compliant in Colorado.”
Hawaii does not have a sales tax at all
This one causes real confusion for mainland businesses selling into Hawaii, and for Hawaii businesses selling out.
Hawaii has a General Excise Tax, and it is structurally different from a sales tax. A sales tax is imposed on the buyer and collected by the seller. The GET is imposed on the seller, on gross income from doing business in the state. Not profit, not taxable sales, gross receipts.
Three consequences matter:
- It applies to services, not just goods. Consultants, designers, contractors, and other service businesses owe GET on their service revenue, which catches out anyone who assumed services are untaxed the way they are in many states.
- You owe it even if you do not collect it. Because the tax is on you, failing to pass it through to your customer does not remove the liability. It just means you absorb it.
- The pass-through math is not intuitive. The base rate is 4 percent, and all four counties now add a 0.5 percent surcharge, bringing most business activity to 4.5 percent. To actually net your intended amount after paying GET on the surcharge you collected, the correct visible pass-through rate is 4.712 percent, which is why you see that odd number on Hawaii invoices.
Hawaii’s economic nexus threshold is $100,000 in gross sales or 200 separate transactions in the current or prior year, and every sale counts toward it, taxable or not.
What to do about it
You do not need to solve every state at once. You need visibility:
- Pull a report of your sales by state for the last two calendar years. Most accounting and e-commerce platforms will do this in a few clicks.
- Compare each state against its threshold, remembering that gross sales usually counts, not just taxable ones.
- Note which states you are close to. Approaching a threshold is a planning opportunity. Crossing one unnoticed is a liability that grows every month.
- If you have already crossed somewhere and not registered, address it deliberately. Many states offer voluntary disclosure programs that limit the lookback period and waive penalties, and those programs generally stop being available once the state contacts you first.
Back sales tax is uniquely painful because you cannot go back and collect it from your customers. It comes out of your margin.
The bottom line
Sales tax nexus is driven by where your customers are, not where your desk is. The thresholds are low, the rules vary by state, and Colorado’s home rule cities and Hawaii’s General Excise Tax are two of the most commonly misunderstood regimes in the country. A short review of where your revenue actually comes from will tell you whether you have an issue.
If you are selling across state lines and are not sure where you stand, reach out to Key2 Accounting. We help small businesses in Colorado and Hawaii sort out multi-state obligations before they turn into assessments.