Many companies are not aware that tax regulations in each state may obligate them to collect and pay sales & use tax even when they do not have a physical presence there. Determining sales tax nexus is a tricky proposition, and there are many moving parts to monitor.  In this article, TaxConnex shares what sales tax nexus means, how it is determined, and offers suggestions to help companies meet their obligations under the law.

You’ve established you have nexus in multiple states, and understand the taxability of your products and services, now what?

As part of the financial terms of any potential transaction, you’re likely looking at the ratio of current assets to current liabilities, revenue and net income growth, operating cash flow, market opportunity, etc.  But what about sales tax? 

Drop shipments are more prevalent in today’s marketplace than most realize –many purchases made online today are commonly drop-shipped to consumers, transactions that typically involve multiple states and parties. Navigating the application of sales and use taxes and related exemptions in a drop shipment scenario is tricky for both the retailer and the drop-shipper. 

Technology companies frequently engage in sales tax nexus creating activities without realizing it.  Many different activities can create “nexus”, the link that establishes the need for a seller to adhere to the jurisdiction’s sales tax rules.  And with the introduction of economic nexus in 2018, it has become even more confusing.

Sales and use tax nexus has become a major headache for any business that sells into the United States. But what exactly is nexus for sales and use tax purposes, and where does it come from, anyway?

You might be thinking, “Sales tax. Let them find me.”

Sales and use tax nexus is a connection between a person or entity and a taxing jurisdiction.  Sales tax nexus is the basis for all your sales tax decisions because without sales tax nexus you have no further obligation to a state.  If you do have sales tax nexus, then you need to dig a bit deeper.  But what exactly defines when you have sales tax nexus?

Why would states go through all the trouble of enacting economic nexus to grow their tax coffers and then ease off on the restrictions - especially big states like New York and California, which were once expected to garner nine and even ten figures in tax revenue from nexus legislation?

The Wayfair ruling earlier this year opened the door to states to require out-of-state sellers to collect and remit the sales tax due.  However, there has been backlash from states that don't have a state level sales tax - the so called NOMAD states of New Hampshire, Oregon, Montana, Alaska, and Delaware.

A bipartisan bill was introduced in response to the US Supreme Court's Wayfair decision this past June. In that decision, the Supreme Court ruled that certain remote sellers should remit taxes for multiple states, not just their home state.  However, with the massive complexity of tax law surrounding each individual state, the Supreme Court advised Congress to simplify things.

A bill introduced by Congress will seek to put the brakes on the ability of states to require remote sellers to collect sales tax on transactions completed through the internet.  The bill is in response to the June Supreme Court ruling that requires remote sellers that do business with residents of the state but do not maintain a physical presence in the state to collect the sales tax due.

The Alabama Department of Revenue set an Oct. 1 deadline for remote sellers with more than $250,000 in annual sales to sign up for the Alabama Simplified Sellers Use Tax Program (SSUT) and start collecting sales tax.  Additionally, Marketplace facilitators will be required to sign up for SSUT and start collecting on behalf of their third-party sellers as of January 1, 2019.

Moving fast, Wisconsin is one of the first states in the US set to require out-of-state businesses to collect sales tax.  Wisconsin's levy begins Oct. 1.  The US Supreme Court decision in South Dakota v. Wayfair Inc. has provided states the option to require out-of-state businesses to collect and remit sales tax including those businesses that sell over the Internet.

The South Dakota v. Wayfair Inc. sales tax decision by the US Supreme Court does not mean all online vendors must begin collecting sales tax immediately.

Lawmakers in the state of Arizona are extremely interested in the possibility of increased revenue that may be available due to the recent Supreme Court sales tax ruling but are adamant in their stance that they do not intend to allow the situation to become an added burden to its citizens.