What is a nexus?
The concept of sales tax nexus is vital in the field of sales tax law in the United States. It determines whether a business is responsible for collecting and distributing sales tax on sales made within a certain state or jurisdiction. Knowing what sales tax nexus is and how it works is crucial for businesses involved in interstate commerce. Essentially, nexus refers to a business’s connection or presence in a state that triggers the legal obligation to collect and remit sales tax on transactions within that state. Nexus can be established through various activities and factors.
Types of nexus
Physical Presence: Historically, nexus was primarily based on a physical presence in a state, such as having a brick-and-mortar store, warehouse, office, or employees in that state. This physical presence created a clear obligation to collect sales tax.
Economic Nexus Thresholds: The concept of nexus has evolved over time, especially with the rise of e-commerce and the internet. The landmark Supreme Court case, South Dakota v. Wayfair (2018), altered the landscape by allowing states to impose sales tax collection responsibilities on businesses with an economic presence or "economic nexus" in the state, even if they lack a physical presence. Following the Wayfair decision, many states have enacted economic nexus laws that establish specific sales or transaction thresholds. When a business exceeds these thresholds in terms of sales revenue or the number of transactions within the state, it is considered to have economic nexus and must collect and remit sales tax.
Factors Determining Nexus: While physical presence and economic thresholds are the primary factors, other activities can also create sales tax nexus. These may include having affiliates or agents in the state, attending trade shows, storing inventory in third-party warehouses, or providing services on location.
Complications
State Variations: It's important to note that the rules and thresholds for establishing nexus can vary significantly from one state to another. Each state has the authority to set its own nexus criteria and tax rates.
Compliance Responsibilities: Once a business has nexus in a state, it is legally obligated to register with the state's tax authority, collect sales tax from customers, and file regular sales tax returns. Failure to do so can result in penalties and legal consequences.
Nexus and Remote Sellers: The concept of sales tax nexus has had a significant impact on remote sellers, particularly online retailers. It has required many out-of-state sellers to collect and remit sales tax on sales made to customers in various states, even if they lack a physical presence.
Navigating Nexus Obligations: Due to the complexity of sales tax laws and the variations in nexus rules among states, businesses often seek assistance from tax professionals or use sales tax compliance software to manage their obligations efficiently and accurately.
Sales tax registration
Click the link below on how to register your business for sales tax and access more information by state.
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