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Many businesses are confused about the concept of sales tax nexus and how it applies to their sales and use tax liability. The nexus rules are different from state to state, causing companies to be unsure which jurisdictions can require them to collect sales tax.
This article will explain the basic concepts behind sales tax nexus, provide examples of notable state laws, and offer information to help companies comply with the relevant regulations.
Sales tax nexus is defined as a connection a person or business has with a taxing jurisdiction. The concept of economic nexus came into existence in 2018 after the Supreme Court Case South Dakota v. Wayfair. It defined the thresholds by which a remote business establishes sales tax nexus with no physical presence in the state simply by selling into a state. These economic nexus thresholds are based on the total number of transactions within a state and/or the total amount of sales revenue within a state. Many states have followed the example of South Dakota and put economic nexus laws into place. However, the thresholds in the number of transactions or revenue are not always consistent among each state. Most states, but not all, use $100,000 in revenue or 200 individual transactions to measure whether economic nexus has been established.
Below are the steps that companies should follow to determine whether they have nexus in a particular jurisdiction and how the nexus laws work and what is needed to prepare and file various sales tax returns.
One way to determine where you have economic nexus is to map out where you have customers and revenue. Some of the economic nexus thresholds consider only taxable revenue, where other states will consider gross revenue. For a high-level analysis, start with gross revenue, and if you are over the threshold, and the state only considers taxable revenue as part of their measure for whether you have reached a threshold, then take a closer look.
However, revenue is only one of the criteria for establishing economic nexus. The other is the total number of transactions or invoices in the state.
In addition to reviewing the amount of revenue sourced to a specific state, you should also determine the total number of individual transactions or invoices to customers in that same state.
Knowing the revenue AND the number of transactions, you can review the specific rules from state to state to determine if you have economic nexus or not.
Understanding where you have economic nexus is only part of the equation. You must also determine where you have a physical presence. Many believe that economic nexus replaced physical presence, but that is not the case. Physical presence is a separate, yet just as important, analysis. You can have EITHER an economic presence OR a physical presence – either of which will create sales tax nexus.
One of the most important tasks regarding nexus determination is tracking current and upcoming changes to the law. Not knowing about a change is not an excuse for lack of compliance. Your company or its executives could face significant fines and penalties if you do not comply with all sales and use tax laws.
Once you’ve determined you have sales tax nexus, you will need to consider whether your products and services are subject to sales tax in each jurisdiction in which you have nexus. Generally speaking, the sale of tangible personal property is taxable, while services are exempt. However, there are many exceptions to this general statement. For example, Software-as-a-Service (SaaS) is taxable in many states, as are telecommunications services. A detailed analysis, state by state, is the safest way to determine whether you have an obligation to collect sales tax from your customers.
Knowing where you have sales tax nexus and whether each state taxes your particular product or service will provide you with a roadmap for calculating and charging sales tax to your customers. Of course, you will also need to consider whether certain customers are exempt (think resellers, certain non-profits, certain government entities, etc.) and also the applicable tax rate in each jurisdiction. Many accounting systems are capable of calculating sales tax, and for other more complex situations, sales tax software integrated with the accounting system may be necessary.
Once you have calculated the sales tax due and charged your customers, you will be responsible for filing the applicable sales tax returns and remitting the sales tax liability to each jurisdiction. Filing sales tax returns in multiple states is complex, and there’s much more to it than simply filing. It may be best to hire a specialist firm like TaxConnex to help you manage this crucial process.
To file the proper sales tax returns, your company must first register for the appropriate tax type. Did you know there is potentially a separate registration (as well as a different tax return to file) for sales tax versus seller’s use tax versus vendor’s use tax? If your business experiences changes in the way it operates, such as opening a new store or warehouse, this could result in different tax information that needs to be filed. You are responsible for communicating these changes to the state(s) in question. In many cases, simply using a software solution to determine your tax liability is not enough to catch these situations and adequately account for them.
For example, if a retailer in Massachusetts sold merchandise to a location in Michigan, the retailer would remit the seller’s use tax to the state of Michigan. If a retailer in Massachusetts sells a product within the state, it would owe sales tax to the state of Massachusetts.
Companies of almost all sizes see the complexities involved with maintaining sales tax compliance, and it can get quite confusing. Turning to a qualified provider like TaxConnex can help you navigate through the world of sales taxes. Working with a sales tax provider can come with many benefits, such as:
No-Risk - At TaxConnex, our professionals keep you off the hook. We take full responsibility when preparing and filing your sales tax returns.
Complete Backup and Support - TaxConnex has your back if something goes wrong. We offer complete and comprehensive services to help you stay compliant.
Experience and Expertise - TaxConnex professionals have the experience and knowledge to help ensure you stay sales tax compliant. We are comprised of sales tax professionals with many years of experience, not call centers and tech support. When you speak with TaxConnex, you’re talking with the experts.
TaxConnex’s services benefit businesses of all sizes and especially multi-state businesses with no internal sales tax expertise. From understanding nexus obligations to determining taxability, managing and auditing, and preparing and filing your returns, TaxConnex has you covered. Contact us with any questions you may have regarding nexus or how to maintain your on-going compliance.