Why Its Important That Small Business Owners Understand Sales Tax Nexus
As the business owner, you are responsible for meeting your sales tax obligations. This includes knowing whether a sales tax nexus applies to your business in any state that you operate in. Here are a few reasons understanding sales tax nexus is important:
- You are responsible for collecting sales tax from your customers. If you fail to do so, your business is the one left holding the bill for state taxes.
- You need to register for a nexus. If you fail to register for nexus in a specific state, you may be responsible for paying back taxes plus interest.
- Youre responsible for being aware of all laws pertaining to sales tax nexus. For example, businesses are not permitted to advertise that they dont collect sales tax merely because they have not established nexus. So, you cant state that you have the lowest prices around because you dont charge sales tax.
Some states can be quite aggressive about pursuing sales tax nexus because it means more revenue for them. If you think theres a chance you may have missed a nexus registration, a tax professional can help you by performing a nexus study.
Online Or Economic Nexus
When e-commerce sales began, companies collected sales tax only from residents of the state where their business was established. But because of South Dakota v. Wayfair, referenced earlier, businesses are now required to establish an economic nexus with any state where they conduct business, whether they have a physical presence in the state or not.
And because most states have different nexus requirements, each state will need to be handled separately.
What Does Nexus Mean
âNexusâ refers to a commercial connection in the state.
Traditionally, it has meant âsufficient physical presence,â and there are multiple ways to satisfy the requirement of a âsufficient physical presence.â It can be through a brick-and-mortar office, a single sales representative, a high-grossing affiliate business, or even using cookies on computers located in the area.
A nexus is something you have. Your business either has nexus in a state, or it doesnât have nexus in a state. When you do have nexus, that means youâre obligated to collect tax on your sales there.
The trick is to know your status. And that is tricky, indeed.
Itâs tricky because nowadays there are several different kinds of nexus, and they vary from state to state.
Plus, many states are changing their nexus definitions in order to capture tax from remote sellers. Who are remote sellers? According to Streamlined Sales Tax:
âRemote sellers are generally businesses that sell their products to customers in a state, using the Internet, mail order, or telephone, without having a physical presence in that state.â
So, other types of nexus have emerged that go beyond the physical to the distance-selling and digital realms. These are especially important to watch since the Supreme Court decision on Wayfair in June 2018, which knocked the âphysical presenceâ precedent off its throne, setting off a wave of new tax policies that affect remote sellers.
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Examples Of Nexus In A Sentence
nexusnexusnexus Fortunenexus Wirednexus Bloomberg.comnexus CNNnexus Forbesnexus San Diego Union-Tribunenexus courant.comnexus Washington Post
These example sentences are selected automatically from various online news sources to reflect current usage of the word ‘nexus.’ Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.
What Is Public Law 86
Public Law 86-272 is an interstate commerce law Congress established to add restrictions to the way states could claim income tax nexus beyond a physical presence. This Public Law names a number of exceptions that exempt some businesses from income tax requirements.
In every state, your business can engage in the following activities without impacting your income tax nexus:
- You are only selling tangible property
- You are only soliciting in a state
- You have employees and independent representatives that are only soliciting
- Your orders are accepted and fulfilled outside of the state,
What this law ultimately does is limit the sales tax liability of many businesses that engage in these activities.
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What To Do Once Nexus Is Established
As we mentioned, its your responsibility as a business owner to ensure youre complying with tax laws. This includes paying sales tax to states where theres a nexus established. Nexus obligations can be confusing with all the different state requirements and how they may apply to your business. However, its essential that you understand what sales taxes youre responsible for.
Once youre aware that the states nexus threshold has been metwhether thats in sales volume by dollars or transactionsyou will need to:
How Will Income Tax Nexus Change In The Future
Looking forward, its likely that the landscape of income tax nexus will continue to change.
Income tax historically has been defined by the standard of physical presence. But what were seeing now is that more states are adding economic nexus to the way they define income tax.
States like Texas and Hawaii are basing their new legislation on the frameworks they used to establish economic sales tax nexus in the wake of Wayfair. In many cases, the income tax and sales tax economic thresholds are similar.
Another thing to keep in mind is that the physical and economic thresholds are likely to change. States have the power to set thresholds as they see fit, and its possible some may lower their thresholds to capture more revenue.
Given all of these potential changes, you cant just look at your income tax nexus once and stay compliant. Youll have to stay on top of shifting legislation and thresholds, and the ways they will impact your business.
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What Is The Legal Term Nexus Mean
5/5Nexus LawLegal Definitionnexuslawtermmeans
Subsequently, one may also ask, what is a nexus between people?
: a connection or link between things, persons, or events especially that is or is part of a chain of causation. History and Etymology for nexus. Latin, bond, tie, from nectere to bind.
Similarly, how do you use the word nexus? ?
Then, what does the legal term Nexus mean?
Nexus Law and Legal Definition. Generally, a nexus refers to a connection. In case law, the term may appear when discussing the legality of a governmental restriction, and whether the means of restriction is justifiable in light of the right being restricted.
What is the nexus principle?
In this article, the author analyses the legal status of the so-called ‘nexus principle‘, i.e. the requirement that a qualifying connection exists between the state exercising its taxing power on the one hand and taxable subject and/or taxable object on the other.
How Tax Nexus Works
Heres a general overview of how the state tax nexus process unfolds:
- Your business starts selling or operating in a state, such as Illinois.
- At a certain point, your business activities meet the economic or physical nexus threshold.
- Sales tax nexus is legally established.
- You are required to register as a seller in that statethis goes for every state that the sales tax nexus applies.
- You begin collecting sales tax, which you will then turn over to the state taxing authority when you pay taxes.
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Understanding Nexus And What It Means For Your Business
As a small business owner, youve likely been introduced to all kinds of financial and legal terminology youve never seen before. Todays word-of-the-day is nexus.
The primary usage example of nexus is as a legal term that refers to the obligation for businesses to collect and pay state sales taxes. However, taxing jurisdictions in the United States cannot impose sales taxes until they establish nexusa connection between your business and local jurisdiction.
While it might sound straightforward, its anything but. There are a variety of circumstances that may establish a sales tax nexus for your business, even if you dont have a physical store there. The growth of e-commerce and the explosion of online sales following the COVID-19 pandemic have also further complicated how sales tax nexus applies to businesses, and there are key elements to understand when it comes to tax compliance.
To help you sort out whether you are obligated to pay sales tax to certain states, weve created this guide. To understand what a nexus is, the various requirements, and why it matters for your business, keep reading. Or use the links below to jump to a specific section.
Quick Guide To Us Sales Tax Nexus
Tax policies are detailed and convoluted. Many guides try to pack in as much information as possible, which makes reading the guide almost as overwhelming as reading the original tax policy! So weâve kept it simple. Weâve zeroed in on the most necessary information to grasp how sales tax nexus works in the USA.
As the title promises, hereâs a brief-but-thorough guide to US sales tax nexus in the physical and digital realms.
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What Is A Nexus Study And Does Your Business Need One
Featured content
Whether you are new to the world of sales and use tax or youre a sales tax veteran, you might have come across this term, nexus study. But what does it mean? We know nexus is Latin, and means to bind, join or tie. In sales tax terms, nexus isnt quite as friendly. When online sellers see the word nexus all they can often think about is sales tax nexus which occurs when your business has some kind of connection to a state. All states have a slightly different definition of nexus, but most of the time states consider that a physical presence or economic connection creates nexus. If you have nexus in a state, you are required to register with the state and collect sales tax from your customers.
So with that in mind, what is a nexus study? And whats the purpose? Lastly does your business need one?
If I Am Not Registered For Sales Tax Income Or Gross Receipts Taxes Are Not An Issue
Contrary to popular belief income tax nexus has nothing to do with sales tax. You could have a responsibility to pay income tax and not sales tax or vice versa. Or you may have a responsibility to pay both. Many clients and potential clients who ask to deregister for sales tax do not realize they may still have a responsibility to pay income tax. For example, many companies that dont have taxable sales like those who only have sales for resale or now those that only sell through marketplaces fail to recognize they may still owe income tax.
Summary
The exposure for sales tax is generally much greater than the exposure for income tax because sales tax is generally based on sales revenue and income taxes are basically based on profits. Smaller companies generally dont have enough exposure to be worried. However, larger companies do. My prediction is that at some point in the next two years states will become much more aggressive on the income tax side seeking larger sellers. Large Amazon FBA sellers will not be excluded from this push by states. If you or your clients have questions we have a free webinar where we compare income and sales tax nexus. Here is a link to all our free webinars. If anyone needs help figuring out where they may need to pay income tax we suggest starting with the free webinar and if you still need help you may contact us at to learn about additional service.
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Corporate Income Tax Nexus
Corporate income tax nexus is muddier than the other two. In Kates case, her proximity to Colorado will likely result in a nexus for income tax purposes. Income tax nexus can occur if you derive income from within the state. And because Kate has a lot of customers that reside in Colorado, chances are her income from Colorado residents will establish an income tax nexus with the state that will need to be addressed on her tax return.
Of course, because her business is in New Mexico, Kate also has an income tax nexus there, which will need to be filed with her personal or corporate income tax return.
Identify States Where You May Have Economic Nexus
In any state where you have sales, you can have economic nexus. Since every state is different, you will need to determine the states where youre selling and then research the sales threshold established in that state.
For example, Colorado has a sales threshold of $100,000 or 200 transactions. So if you have more than $100,000 in sales in Colorado or more than 200 sales transactions, you will need to begin collecting sales tax from your customers. Keep in mind the threshold in most states includes the current and the previous years totals.
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Types Of Nexuses In Online Sales
States have come up with several ways to determine a nexus for online transactions.
- A click-through nexusis a direct connection between the buyer and the seller. This can occur when a business within the state is paid a commission for referring sales to an out-of-state seller, such as via a link on a website.
- An affiliate nexusinvolvesaffiliates that are independent businesses that sell through other businesses. The Amazon Affiliates program is a good example. An affiliate isn’t an employee or even an independent contractor, but is actively associated with a business, and states have been using this connection to capture sales taxes. This type of nexus often requires that a commission for referrals be paid by the affiliate.
- An economic nexusis the simplest way of determining a sales tax nexus. It’s basically just sales. A business might have an economic nexus in a state if it sells over a specific amount or threshold. Idaho has established $100,000 in annual sales as the minimum for establishing a sales tax nexus.
A Few Final Thoughts On Tax Nexus
To remain compliant, you must understand tax nexus. Tax nexus simply means you have a relationship with a taxing authority. Its up to you to manage that relationship appropriately by knowing the requirements of each of the taxing authorities. The easiest way to do this is to use sales tax software, which helps you establish nexus, collect the correct sales tax, and remit the tax owed to the proper tax authority.
The Motley Fool has a Disclosure Policy. The Author and/or The Motley Fool may have an interest in companies mentioned.
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How A Tax Nexus Works
Although the definition of nexus can vary by jurisdiction, it generally requires that a business must commit to a certain type of action in the jurisdiction. Your business might be considered to have a nexus in a location, for example, if it’s a place where your business:
- Maintains an office
- Employs workers
- Store products or supplies in a warehouse
This would require that you establish a sales tax rate for that location and collect it from any resident of that location who buys products from you. You would most likely also have to pay income tax to that state.
Physical Vs Economic Nexus: Whats The Difference And Why Does It Matter
March 23, 2020 | BY Ryan Johnson| Posted In Economic Nexus
If you want to understand sales tax , youll need to understand the difference between physical and economic nexus. Heres how to figure it out.
There are plenty of articles that explain the difference between the two types of nexus. The problem is theyre often written in confusing legal and accounting jargon, which is ultimately unhelpful if youre a business owner one with a lot to worry about. To help, we created this basic overview of what each term means, how theyre different, and why knowing the difference matters all in plain English.
What is Sales Tax Nexus?
You might be wondering, Wait, what is nexus?
Nexus is a legal term that refers to sufficient presence, or connection. States nexus with companies so they can collect sales tax from their business operations. Sales tax nexus, often just referred to as nexus, is just the minimum connection a business must have to be liable for sales tax in that state.
But heres where it gets tricky: states use sales tax nexus interchangeably to refer to two different types of nexus: physical and economic.
What is Physical Nexus?
Under National Bellas Hess v. Department of Revenue and Quill, only a physical nexus mattered in order to qualify for the sales tax requirement. This means that if a seller didnt have a physical connection in the state, it didnt have to worry about sales tax.
Here are some examples of potential physical nexus triggers:
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