For online businesses, navigating the ever-shifting sands of sales tax can feel like wandering through a labyrinth. One wrong turn, and you could face unexpected tax liabilities and penalties. Understanding sales tax nexus – the connection that triggers your obligation to collect and remit sales tax in a state – is crucial for ensuring compliance and avoiding costly missteps.Â
The Big Four of Sales Tax Nexus:
While the definitions can vary state-by-state, there are four main types of nexus you need to be aware of:
- Physical Nexus:
The classic brick-and-mortar scenario. Having a physical presence, like a store, office, or warehouse, in a state automatically creates nexus. This is the most traditional form of nexus and occurs when a business is physically in a state. Some examples include:- Having a store, office, warehouse, or other physical location in the state.
- Hiring employees or contractors who work in the state, even if remotely.
- Storing inventory or other property in the state.
- Economic Nexus:
This type of nexus is based on a business’s economic activity within a state, regardless of whether it has a physical presence there. Since the landmark ruling of Wayfair vs South Dakota in 2018, states have adopted economic nexus laws, which often trigger a sales tax obligation if a business meets certain thresholds for sales, transactions, or revenue generated within the state. These thresholds vary by state and can be based on factors like gross receipts, taxable revenue, number of transactions, or a combination of both. - Affiliate Nexus:
This type of nexus arises when a business has a relationship with another entity (an affiliate) that has physical nexus in a state. If the affiliate refers customers to the business or assists with sales in any way, the business itself may be found to have nexus and be responsible for collecting sales tax. However, the specifics of affiliate nexus vary by state, so careful analysis is important. - Click-Through Nexus:
This type of nexus is relatively new and less common, but it’s worth mentioning. It generally applies when a business operates solely online and uses an affiliate in a state to link to its website and generate sales. Some states have laws establishing click-through nexus, but the legal landscape is still evolving and varies widely.
Navigating the Labyrinth:
Staying compliant with sales tax nexus can feel daunting, but here are some helpful tips:
- Stay informed: Regularly update yourself on changes in nexus laws, especially for states you have business in.
- Seek professional guidance: Consulting a tax professional with a specialization in SALT, experienced in e-commerce can save you time, money, and headaches.
- Leverage technology: Many software solutions can help you track sales activity and manage nexus compliance across various states.
- Register and remit responsibly: Once you establish nexus in a state, promptly register and start collecting and remitting sales tax.
Failing to comply with sales tax nexus can result in significant penalties, interest charges, and even potential audits. By understanding the different types of nexus and taking proactive steps, you can navigate the sales tax labyrinth with confidence and ensure your business stays on the right side of the law.
Sales Tax Nexus with Source Advisors
When it comes to sales tax nexus studies, it’s crucial to explore your options and find the right solution for your business. Source Advisors is well-versed in the complexities of sales tax nexus and offers expert assistance to businesses in need. Our team of seasoned professionals can guide you through the process and provide accurate and comprehensive sales tax nexus studies.Â
Our tailored approach means we consider the unique aspects of your business. Whether you operate as an e-commerce business, a brick-and-mortar store, or a combination of both, we provide a sales tax nexus study that meets your specific needs.Â
