What is Sales Tax Nexus?
What is a sales tax nexus?
An e-commerce retailer doing a web search for sales tax nexus is like a sick person searching symptoms on WebMD. You’re likely searching because you think you might have a problem.
This article will explain what nexus is, lay out common scenarios in which your business might have a sales tax nexus in a state, and give you next steps to making sure your business is sales tax compliant.
Sales Tax Nexus, Defined
At its simplest, sales tax nexus is a “connection” to a state strong enough that that state can require you to collect sales tax from your buyers in that state.
In the US, forty-six states and Washington DC all have a sales tax. Each state is allowed to make their own rules and laws when it comes to sales tax, and because of that what constitutes nexus in each state is slightly different. (Need a refresher on sales tax? Check out our “Sales Tax Concepts, Explained” article.)
Here are some of the most common business activities that create a sales tax nexus:
- A location – this can be anything from you working from your kitchen table to a chain of stores and warehouses. If your business has physical presence in a state, then you’re generally required to collect sales tax from buyers in that state
- Personnel – Employees, contractors, salespeople, and other people who work in your business generally create sales tax nexus
- Inventory – Storing items in a warehouse in a state generally creates sales tax nexus
- Doing business temporarily – Many states consider brief periods making sales at trade shows, conferences or craft fairs to create sales tax nexus
- Economic nexus – Your business does a state-specified amount of business (either in dollars or number of transactions) in the state creates nexus
In a nutshell, if you have any physical presence in a state or significant sales in a state then your business likely has a sales tax nexus in that state.
What is economic nexus?
You’ll notice that all of the nexus-creating factors above have something in common: they rely on your business having some kind of physical presence in the state.
That’s all except economic nexus, which you could call the newest form of sales tax nexus. The 2018 South Dakota v. Wayfair Supreme Court case allowed states to require that businesses who do a certain amount of business in the state collect sales tax from buyers in that state.
The court ruling came in response to South Dakota’s claim that big out-of-state retailers who had no physical presence in the state were benefiting from not having to collect sales tax. The Supreme Court agreed, and every US state with a sales tax has now passed an “economic nexus law” requiring online retailers who surpass a certain threshold of transactions or sales collect sales tax from buyers in their state.
That threshold is generally $100,000 in sales per year and/or 200 transactions per year, but each state varies.
See the following articles for more information on economic nexus and a state-by-state chart of economic nexus thresholds:
I have a sales tax nexus. Now what?
If you have nexus in a state then the state requires you to get sales tax compliant by registering for a sales tax permit. Once you have a sales tax permit, your next step is setting up sales tax collection on all of your sales platforms.
From there, the state requires that you periodically file a sales tax return and remit the sales tax you collected. In general, the more sales tax you collect, the more often you’re required to file.
Sales Tax Nexus FAQ
What do I do if I’m unclear if I have a sales tax nexus?
First, you are not alone. The fact that every state makes their own laws, rules and regulations when it comes to sales tax means it isn’t easy to determine if your business has a sales tax nexus. If you are unsure whether you have nexus, we can help. Contact HOST for a nexus study and be sure that your business is sales tax compliant.
I didn’t realize I had a sales tax nexus. What do I do?
The best thing you can do is get on top of this situation immediately. The worst thing you can do is ignore sales tax and cross your fingers that you never get caught. If you haven’t been sales tax compliant, states can levy penalties and interest going as far back as the start of your business.
Contact HOST for a nexus analysis. We’ll analyze your business activities and determine if you should have been collecting sales tax in a state (or states.)
From there, we’ll mitigate any damage. Most states allow a “voluntary disclosure agreement” where we can negotiate lower penalties and interest in exchange for getting sales tax compliant now and in the future.
I have a sales tax nexus in a state, but I only sell on Amazon (or another online marketplace.) Do I have to register for a sales tax permit?
Major online marketplaces like Amazon, eBay, Etsy or Walmart are now required to collect and remit sales tax on behalf of the 3rd party sellers who use their sites. Some states still require online sellers who exclusively sell through online marketplaces to have a sales tax permit. Other states do not. We’re happy to help you determine if you need to register for a sales tax permit in a state.
Also be wary if you sell on an online marketplaces but also through other channels, like a craft fair or your own online store. While big marketplaces like Amazon or Etsy are required to collect sales tax on your behalf, you’re still required to collect sales tax in your nexus states when selling through any other sales channels.