Understanding Sales Tax Nexus
Sales tax is complicated. If you are a new business, or you have sales in a new tax jurisdiction, or maybe you just realized that you are supposed to be collecting sales tax, you might be ready to panic.
Don’t panic. You need to answer three questions:
- Where do you have nexus?
- Are your goods or services taxable in those places?
- What is the correct sales tax rate on taxable goods in the places where you have nexus?
If you are really on the verge of panic, go ahead and call Sales Tax DataLINK at 479-715-4275 right now. We can take on your sales tax compliance from finding the answers to those three questions to filing your returns.
Now let’s get clear answers to those questions. This article will answer the first question and we will examine the remaining questions in upcoming articles.
“Nexus” = “connection”
The word “nexus” means “connection.” There are thousands of sales tax jurisdictions in the United States, and the rule is that you must collect sales tax for every jurisdiction where you have a strong enough connection.
Before 2018, that meant a physical presence. You had to have a warehouse, office building, or some other actual physical connection with a state before you needed to think about collecting sales tax there. There were court cases that looked closely at the question of what constituted a physical presence, but generally speaking the situation was fairly clear cut.
Types of nexus
The Supreme Court decided in 2018, in a case called Wayfair, that states could make their own laws defining nexus for their state. Instead of a single national definition of nexus, every state gets to decide for their own state how they choose to define nexus.
For example, your company has nexus for sales tax in Washington state if you have physical nexus, if you have $100,000 or more in revenue sourced in Washington (including wholesale revenue), or if your company is organized in Washington state.
So, for example, if you manufacture socks, you would have nexus in Washington state if either of these things are true:
- You have a warehouse in Seattle. This means you have physical nexus.
- You have $90,000 in wholesale revenue from retailers in Washington state plus $10,000 in direct to consumer sales.
You will have to collect sales tax in Washington. You have nexus in either case. If you have $100,000 total revenue and any direct to consumer sales at all, you will have to register to collect sales tax and go through the whole filing process even if your retail sales are small.
Let’s say you also have connections in California, with one of these two scenarios:
- You lease a computer server in California. Under California law, this establishes physical nexus.
- You have online sales over $500,000 originating in California, but all are sales by retailers who buy your goods wholesale. They are responsible for collecting sales tax and you do not have economic nexus.
You have sales tax nexus in California in the first case because you have physical nexus. You don’t have to collect sales tax, though, because all your sales are wholesale. You don’t have economic nexus because, unlike Washington state, California doesn’t count wholesale revenue.
These are just two of the 50 states. Stripe reports that 80% of their customers sell to 20 or more states or countries. Every one may have a different set of standards for defining nexus.
Consider that there are 50 states, 5 inhabited territories, and more than 12,000 sales tax jurisdictions in the United States. You must identify all the jurisdictions where you have revenue and determine for each one whether you have nexus or not.
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