Navigating Sales Tax Nexus

As a small business owner, staying up-to-date on sales tax rules can be overwhelming. Unfortunately, it's not something you can ignore. Failing to comply with changing sales tax regulations can lead to hefty penalties and fees that could ultimately put your business in danger.

Photo by Nathan Dumlao on Unsplash

One of the most challenging aspects of managing your sales taxes is understanding when you have "nexus" or a connection with a taxing jurisdiction that allows it to impose sales tax obligations on you.

So let's break down what sale tax nexus is, how it works, and explain some recent updates so you know exactly what steps you should take next.

What Is Sales Tax Nexus?

The sales tax nexus is your relationship with the state you operate in. If you have a physical presence in a state or local jurisdiction or meet specific sales or transaction thresholds, you may be required to collect and pay sales tax to its taxing authority.

Many people think of sales tax in terms of a state's taxing authority, but you may also be subject to taxes levied by counties and localities.

Sales Tax Nexus: Background

In the past, business owners mainly collected sales tax in states where they had a physical presence—an office or warehouse or an employee working in the state. That made sales tax compliance simple. However, the Supreme Court's ruling in South Dakota vs. Wayfair shook things up for online businesses and companies that sell products and services across state lines.

The decision in that Supreme Court case expanded the definition of sales tax nexus beyond just having a physical presence in the state. Now, small business owners have to collect sales tax if they have economic nexus: a certain dollar amount of sales or a number of transactions in a particular state (or both). All kinds of remote sales can trigger economic nexus, including online sales, telephone orders, and catalog sales.

To be clear, physical nexus still applies, so businesses must still collect and remit sales taxes in any state where they have an office, a remote employee, an affiliate, or temporarily do business. However, adding economic nexus rules complicates compliance for even the smallest companies.

Navigating Sales Tax Nexus Rules

What makes navigating knowing when you need to be collecting sales tax in a state or local jurisdiction so complicated post-Wayfair is that each state has a different economic nexus threshold. Some states base sales tax nexus on the dollar amount of your sales, others on the number of transactions, and some have both.

Sales Tax Nexus Rules by State

Here in Nevada, businesses that make more than $100,000 in sales annually in the state or have more than 200 transactions in the state in the previous or current calendar year have economic nexus. However, California requires anyone with $500,000 to charge sales tax on sales of tangible property delivered into the state.

In addition, states have different definitions for the types of sales included in reaching the sales tax nexus threshold. Most use gross sales, which includes all sales—not just taxable ones. Some use retail sales, which doesn't include any sales intended for resale, and some use taxable sales, which excludes tax-exempt sales, like those made to exempt organizations and sales of exempt products.

Some states, including Delaware, Montana, New Hampshire, and Oregon, don't collect sales tax. So if you operate in those states, you don't have to worry about collecting sales tax, even if you have a physical location there.

To find your state's sales tax nexus standards, check out this resource from Avalara.

How to Know When Sales Tax Nexus Applies to You

As you can see, the laws are complex, especially if you have remote employees around the country, use third-party affiliates, or sell online.

If you're worried about your sales tax nexus exposure, here are your next steps:

1.    Determine where you have a physical presence. If you have a business location or remote employee in another state, you should be registered with that state's taxing authority and collecting sales tax on any sales there.

2.    Determine where you have economic nexus. This is more complicated because each jurisdiction has its own economic nexus legislation. Besides knowing when you've reached economic nexus with a state, you must figure out when to register with the state after meeting that threshold. Some states provide a grace period (usually 60 days), but others require registration with the next transaction, so watch your sales activity closely.

3.    Get help managing your sales tax compliance. Unfortunately, managing sales tax compliance in-house is impossible for all but the largest organizations. Fortunately, many solution providers can monitor your sales transactions, handle the burden of determining nexus, and ensure you're collecting the right tax rate.

Sales tax nexus is a confusing topic you shouldn't try to navigate alone.  If you need help determining where you have sales tax nexus or getting your bookkeeping and accounting in line for accurate sales tax collection, schedule a call with Slate. We can help you get a handle on the sales tax nexus issue so you can focus on running a successful and profitable business.