How is Sales Tax Determined? | Sales Tax Nexus Determination

Your first step to compliance is tracking where you've established nexus.

Historically, Sales Tax Nexus represents a physical connection between an out-of-state business and a particular taxing jurisdiction which makes the out-of-state business responsible for collecting and remitting sales tax on their transactions. Having a physical office or an employee based in a particular state is a clear-cut example of sales tax nexus. However, there are many more subtle activities that could also trigger sales tax nexus that could represent a risk to your business:

Sales reps traveling to another state where they are not based to solicit sales
Employees exhibiting at trade shows
Service technicians traveling into another state where they are not based to perform service calls
An affiliate or agent relationship that supports selling or servicing activities
Maintaining inventory in a warehouse (for example with Amazon's FBA program)

But now you must consider if you have physical OR economic nexus to establish nexus in a state or taxing jurisdiction.

The U.S. Supreme Court ruling in June of 2018 in the case of South Dakota vs. Wayfair, paved the way for states to compel out-of-state businesses to collect and remit sales tax even when they do not have a physical presence. This is often referred to as economic nexus.

Economic nexus is determined by the number of sales made into a state - determined by a sales or revenue threshold. Each state determines its own economic standards and it can be a lot to keep up. Unfortunately standards for economic nexus differ widely from state to state, and have evolved since 2018, so it is important to regularly monitor new sales into states and taxing jurisdictions to determine if you've established nexus.

This can especially be difficult if you are a business based outside of the US.

TaxConnex® helps you identify the relevant sales tax nexus-creating activities and determine where you have an obligation to collect and remit sales tax, often referred to as sales tax nexus determination. Where we determine you have nexus, we will recommend simple, proactive steps based on your risk quotient to remedy any potential exposure.

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