Nexus, Schmexus:
Breaking Down Tax Jargon for Small Biz
Sales tax nexus is a critical concept for businesses selling goods or services across state lines. Whether you’re a brick-and-mortar retailer, an e-commerce business, or a service provider, understanding sales tax nexus ensures you meet your legal obligations while avoiding costly penalties. In this article, we’ll explain what sales tax nexus is, provide examples of what triggers it, and discuss its impact on businesses.
What Is Sales Tax Nexus?
Nexus is the connection between a business and a state that requires the business to collect and remit sales tax. This connection can be physical, economic, or based on other criteria defined by state laws. Let’s break these down:
1. Physical Nexus
Physical nexus is established when a business has a tangible presence in a state. This includes:
- Owning or leasing property: A storefront, warehouse, or office located in the state.
- Example: A clothing boutique with a storefront has physical nexus in that state.
- Storing inventory: Housing products in a third-party warehouse, such as those used by fulfillment centers like Amazon FBA.
- Example: A business using an Amazon warehouse in a state establishes nexus due to inventory storage.
- Employees or contractors: Having workers or agents in a state, even temporarily.
- Example: Hiring a sales representative to attend trade shows in a state creates physical nexus.
2. Economic Nexus
Economic nexus is triggered when a business exceeds specific sales or transaction thresholds in a state, even without a physical presence. States implemented this standard following the 2018 South Dakota v. Wayfair Inc. Supreme Court decision.
- Commonly Used Economic Nexus Thresholds:
- $100,000 in sales or 200 transactions in a state during a 12-month period.
- Example: An out-of-state retailer selling custom furniture online meets economic nexus in a state after reaching $150,000 in sales to customers within a year.
3. Other Factors That Establish Nexus
Beyond physical and economic connections, other activities can create nexus:
- Affiliate Nexus: Partnering with individuals or businesses in a state to promote your products.
- Example: An online retailer with in-state affiliates who earn commissions on referred sales.
- Trade Shows: Attending trade shows or events in a state can sometimes establish nexus.
- Example: A tech company showcasing its products at an annual expo in a state.
- Click-Through Nexus: Contracts with in-state websites for referral-based sales.
- Example: A retailer pays bloggers in a state a commission for sales generated through links on their websites.
How Nexus Affects Your Business
If you establish nexus in a state, you must:
- Register for a Sales Tax Permit: Obtain a permit from the state’s tax authority.
- Collect Sales Tax: Charge the correct sales tax rate based on the buyer’s location.
- Remit Sales Tax: Regularly send collected taxes to the state.
- Stay Compliant: Keep up-to-date with changing state laws and thresholds.
Why Sales Tax Nexus Matters
Failing to understand or comply with nexus requirements can result in audits, penalties, and back taxes. With the complexity of state-by-state rules, staying informed is crucial to protecting your business and reputation.
Let VirtuCount Simplify Nexus for You
Navigating sales tax nexus can be overwhelming, especially when managing a growing business. At VirtuCount, we specialize in helping small businesses understand and comply with their sales tax obligations. Whether it’s determining where you have nexus, registering for permits, or managing compliance, our experts are here to help.
Reach out to us today and let us handle the complexities of sales tax nexus, so you can focus on what you do best—running your business.
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