What Is Sales Tax Nexus?
What is nexus? It’s the legal term used by states to determine the taxable relationship between a business and that state. To collect tax on sales made by a business, nexus needs to be established.
For the better part of 30 years, sales tax nexus was fairly simple. Based on the precedent set in Supreme Court cases in 1967 and 1992, nexus was established by a physical presence. If a business physically existed in a state, that state could collect sales tax on the transactions they performed. If they did not, they could not. When the National Bellas Hess and Quill cases were decided, non-physical nexus was relatively rare, but between 1992 and 2018, commerce was upended by the Internet. As of last year, 19.2% of total retail sales were online, and by the middle of the last decade, states had taken notice of the shift.
Thanks to the 2018 Wayfair decision by the Supreme Court, the retailers involved in the $871 billion in online sales last year must contend with revised sales tax nexus laws in almost every US state.
Establishing Sales Tax Nexus
Sales tax nexus is established when a business has a legally recognizable connection with a state. While the broader definition of what constitutes that connection has changed, it varies from state to state. While physical connection used to be the sole means of establishing nexus in the past, economic nexus is now also a factor in 46 states and an important element to consider in the tax compliance process.
Activities that can currently create sales tax nexus include:
- Having a physical location in a state
- Hiring employees or contractors in a state
- Owning physical assets in a state, including warehouses or storage
- Working with an affiliate in a state who does business on your behalf
- Storing inventory in a state (such as Amazon FBA)
- Completing a certain volume of sales in a state (as defined by economic nexus tax laws)
Each state has a different threshold by which nexus is established, and not all of the above criteria are the same from state to state, so it’s important to know how your activities translate to state-specific requirements.
The Development of Economic Nexus
Prior to 2018, several states attempted to implement new nexus tax laws that captured a portion of the sales tax revenue lost to online sales. Click-through nexus laws established nexus when a company based in a state referred a customer to a website outside of state. Specifically developed to address Amazon’s growing influence in large states like New York and California, click-through nexus laws spread to eight states during the 2010’s, creating contentious relationships between online retailers and these states. In the lead up to Wayfair, increasingly aggressive laws were passed, including Massachusetts’ Cookie Nexus law.
Finally, in 2017, the Wayfair case was brought by the state of South Dakota against Wayfair and several other online retailers, claiming that their failure to collect and remit sales tax on transactions made with South Dakota residents was costing the state up to $58 million a year in revenue. The Supreme Court agreed that the 1992 Quill precedent was out of date, ruling that states had a legal right to enforce their sales tax rates in a reasonable manner.
South Dakota led the way with a law requiring out-of-state retailers to collect sales tax on sales made to South Dakota residents. Today, most states have passed similar tax laws, many with economic nexus thresholds of $100,000 in sales or 200 or more transactions, but there are a number of variations to these laws from state to state. Oregon, Montana, Delaware, and New Hampshire have no sales tax and therefore do not have economic nexus laws. The other 46 states do.
What Does this Mean for Remote Sellers and Online Retailers?
If you do significant business in any state, you are likely on the hook to collect sales tax and remit to that state’s department of revenue. That means:
- Registering to collect sales tax – Every state tax authority is unique with their own process for registering to collect sales tax that you must follow. Changes occur frequently due to economic conditions and political shifts, so it’s important to stay up to date on state and local changes and how they impact sales tax collection.
- Calculating and collecting sales tax based on state and municipality – Manually maintaining accurate logs of current sales tax rates is a daunting task, but accuracy is vital to ensure tax compliance with every state in which you do business.
- Remitting sales tax based on that state’s sales tax calendar – Each state has different rules related to filing deadlines and thresholds. If you make far more sales in one state than another, you may need to file more frequently there. It’s important to carefully monitor these filing deadlines to avoid penalties for late or inaccurate payments.
While small ecommerce stores may not immediately face these requirements, most will eventually, and it requires careful organization to ensure tax is collected and remitted appropriately. Every state is different, so you must maintain a sales tax calendar, implement software that can dynamically calculate tax rates for every transaction, and file those sales tax returns at the appropriate time for every state in which you do business.
With many states shifting to destination-based sales tax nexus, and forty-six unique laws to contend with, it’s important to not only have a firm grasp of what sales tax nexus means for your business, but a system in place that can support your efforts. Designed to work with most eCommerce platforms, automatically calculating sales tax rates and collecting the necessary data to stay compliant, AccurateTax is an invaluable tool in addressing nexus requirements in every state in which you do business. Learn more and start your free trial here.