Published on: 06/7/20 6:49 PM
Last modified on: 08/4/21 7:41 AM
In short, sales tax nexus is a seller’s connection to a state created by certain business activities. These activities might be holding inventory in a state or exceeding a sales threshold into a state. The specific business activities that create sales tax nexus depend on each state’s sales tax nexus laws.
In this blog post, we will further discuss sales tax nexus and how it affects your business.
What business activities create sales tax nexus?
Businesses with offices or retail locations located in a state must obtain a sales tax permit. Offices can include employees who work from home, remotely. It can also include independent contractors who perform work on behalf of the business in the state. Other types of employees include owners, partners, or corporate officers who reside and perform company duties in the state.
Inventories stored within a state, also creates nexus through physical presence. This includes inventories that are stored within a fulfillment center. This is true even if the fulfillment center is operated by a marketplace facilitator.
Economic nexus is a seller’s connection to a state based on their volume of sales into the state. A business with high sales volume would be affected by this type of nexus.
What are the economic thresholds?
The exact thresholds vary by state. The sales are based upon orders delivered to customers within the state. The volume is based on either a dollar amount of sales or number of transactions, or both. Tax nexus in a state is created when such a threshold is exceeded.
Affiliate nexus is created when a one business has a connection to another business that currently operates within the state. This connection creates a nexus for the business that is not operating within the state. They then need to collect and pay sales tax from its in-state customers.
Some examples include selling a similar line of products into a state that has a similar business name. A business (or business) who uses in-state employees or facilities to advertise or facilitate sales. Maintaining an office, distribution facility, or warehouse to facilitate delivery of customer goods. Using an affiliate to deliver, install, or assemble goods.
Sales tax nexus can also be established when salespeople attend trade shows within various states. In some instances, sales made at trade shows would only be taxable, and not all orders shipped into the state. In other instances, all orders shipped into the state may become taxable, usually if a certain threshold is met. Each state has different laws on the taxability of trade show sales.
Some seller platforms are now required to collect and remit sales tax on behalf of sellers. These platforms are known as marketplace facilitators.
Do I still have nexus if I sell through a Marketplace Facilitator?
What is a marketplace facilitator?
A marketplace facilitator is a business that completes the entire sales process for another business. They do everything from listing the product to fulfilling the orders. Amazon.com and eBay.com are two marketplaces.
Many states have enacted “marketplace facilitator laws” which require the marketplace to collect sales tax on orders they process. This relieves businesses who may have established physical nexus through storing of inventory, from the responsibility of collecting. However, not all marketplaces are required to collect sales tax as they may not meet the requirements set for an individual state.
How does this affect my nexus?
If sales tax nexus is established on one sales platform, it is established across all sales platforms. For example, if you make sales on three platforms and only two of the platforms collect sales tax on your behalf, then you’re required to collect & remit sales tax on transactions occurring on the platform not collecting on your behalf.
I have sales tax nexus. What now?
Here's a basic outline of the next steps after determining you have sales tax nexus.
Now that you know you have a sales tax nexus you will need to get registered. This means opening sales tax accounts in the states that you have nexus.
Start collecting sales tax
To start you will need to enable tax collection on the platforms that you are making sales. Some platforms determine the rate for you and others require you to enter the tax rates yourself.
The sales tax accounts you opened will have assigned filing frequencies. That determines how often you have to file returns. You will need to note your return deadlines and make sure you file them every time when they are due. Late returns can accrue penalties and interest. You must file on time even if you have no sales for a period.