What the Heck is Sales Tax Nexus?
As a business owner, the questions of when to register and collect sales tax can be complicated to say the least. We’re here to make it less complicated. Here’s how the tax regulations in your state can determine when and how your company may have nexus.
What is sales tax nexus?
Sales tax nexus is the connection between a seller and a jurisdiction (usually a state), that requires a seller to register to collect and pay sales tax. There are different types of nexus, but the most common are physical and economic.
A physical nexus is the physical connection between your business and its responsibility to collect sales tax in a state. Examples of physical nexus include:
- Having a physical location such as an office, home office, or warehouse
- The location of your employees outside your state (including remote employees)
- Being temporarily located in a location for business purposes
Economic nexus is the economic connection between your business and its responsibility to collect sales tax in a state. Typically it’s based on either sales in a state ($ amount), and/or number of transactions in a state. 45 states and the District of Columbia have sales tax, and currently all but Missouri have economic nexus rules.
What Businesses are affected by sales tax nexus?
Short answer… everyone. You may live in a state that does not have a sales tax requirement, like Montana - if that’s the case, while your transactions within the state are not subject to sales tax, if you go to a trade show in Texas, you now meet physical nexus requirements for Texas. Additionally, if you’re an online seller with an ecommerce storefront selling goods to multiple states, and you meet the threshold for sales dollars and/or transactions, you may have to deal with economic nexus.
What this means for you
It’s important to not only be aware if you trigger any type of nexus, but also when. While some states, such as North Carolina, will give you 60 days to register and collect once you hit the threshold, other states like California require immediate registration once the threshold is met. Knowing exactly when to register for sales tax is the key to minimizing potential fines, like failure to file fees, penalties, and interest.
Here’s Where it Gets More Complicated: Every State is Different
Each state may handle their nexus standards in differing ways. One state may say a trade show attendance from an out of state seller triggers physical nexus. Another state, like Alabama, has economic requirements that a business having $250,000 or more in sales to the state triggers economic nexus. In Washington D.C., the threshold is $100,000 in sales into the district OR 200 transactions. Some states even have specific nexus rules for sales made through marketplaces, like Amazon. So, you can see how important it is to know the nexus rules for the state you’re doing business in.
As you continue to grow your company it’s important to be aware of the additional tax obligations that growth comes with. If your business increases in a state that you previously didn’t have a sales tax nexus in, give your state tax collector a call. This extra step could save you time, money, and frustration during an audit.
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