What is Sales Tax Nexus?

Sales Tax Nexus is incredibly important to understand as an online retailer in the United States and, simultaneously, difficult to understand, making it something many eShop owners decide to overlook. That is, until they’re forced to look at it for some less-than-fun legal reasons. Although complex, the basics of sales tax nexus are a little easier to understand, making them a good place to start.


What is Sales Tax Nexus?

When your business makes a connection to a state, whether via a sale, utilizing a warehouse, or employing someone (to name a few), then you enter into a sales tax nexus. This means that you now have sales tax obligations within that state. And, unfortunately, this is where it starts to get confusing because every single state in the United States has a different understanding of what a nexus is and, of course, have different taxes as well.

In general, a nexus in most states means that you have some sort of physical presence. To make this a little more clear, here’s a list of some of the most common physical qualifiers among states…

  1. Physical office
  2. Employee residence
  3. Warehouse or storage facility for inventory
  4. Affiliates making sales
  5. Temporary physical presence (such as at fairs and trade shows)
  6. Sales

For online retailers, the final “sales” qualifier can immediately present problems; the majority of online businesses make sales in every single state, or at least the contiguous 48.


Origin-Based Sales Tax vs. Destination-Based Sales Tax

Typically you’ll find that states either operate under an origin-based sales tax or a destination-based sales tax. As you start to learn about sales tax nexus, knowing the difference between these two can be helpful.

States that have an origin-based sales tax tend to be simpler than those with destination-based sales taxes. With origin-based taxes, you’re required to charge your customers with the appropriate state and local sales taxes based on the location of your business. If you’re dealing with states that have destination-based sales taxes, then you are required to adjust what your sales taxes are based on where your customers are located. This obviously makes things more complicated because you’re constantly adjusting sales tax rates.


Dealing with Sales Tax Nexus

Knowing that sales tax nexus exists alerts you to at least start investigating what this means for your business, and that’s a good thing. Operating your business unaware of different sales tax nexus can create major issues down the road, which is why it’s best to deal with it head on as soon as possible.

Below are a few steps to point you in the right direction when learning about sales tax nexus for your business…

  1. Make a list of the states you are “physically” present in. Use this as a reference when you start to investigate each state’s unique rules (or when you begin talking with a tax professional).
  2. Be aware that many states choose to be ambiguous in their definition of sales tax nexus, which makes initial research frustrating. Again, this is where a tax professional, or someone with specific knowledge to doing business in that state, can help.
  3. Once you determine that you do indeed have a sales tax nexus in a particular state, then you need to start collecting sales tax from those consumers. And, remember, each state has a different sales tax rate, as do different cities within each state.
  4. You can leverage online tools to help you determine what your sales tax needs to be in each state (and based on the state your business is located). But, be warned, these aren’t always totally accurate or reliable.

The bottom line is that becoming aware of sales tax nexus is incredibly important to ensuring that you’re doing business legally. While it can be confusing at first, once you get rates and details sorted out, it won’t be as complicated — and you can be confident you’re doing sales the right way, without any legal obligations haunting you down the road.

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