What to know about the US Sales Tax nexus?

Selling products across multiple channels expands your business horizons to a large extent. It is a great way to reach myriad demographics. When you sell through several channels, you must collect sales tax from purchasers in the states where you have a nexus. However, handling sales tax manually for retailers who sell through several channels is an unmanageable task. Fortunately, there are technologies and solutions available to make sales tax simple for multi-channel sellers.

Firstly, it is important to know what is sales tax nexus is?

Nexus is a prerequisite condition (an activity, transaction, etc.) between a state and a taxpayer which allows the state to impose its taxing jurisdiction on that taxpayer. A taxpayer with nexus is required to file returns and pay any taxes due

Business activities, such as having a physical presence or exceeding a certain sales level, can trigger a nexus within the state.

The following business activities can trigger sales tax nexus:

  1. Having an office, retail, or another site (even a home office) in a state.
  2. Having a worker, salesman, contractor, or other individuals in a state.
  3. Owning a warehouse or storage facility in a state.
  4. Inventory storage in a state (such as in an Amazon FBA warehouse)
  5. Having a third-party affiliate in a certain state.
  6. Temporarily conducting physical business in a state, such as during a trade exhibition or craft fair.
  7. Sales representatives who go to another state to solicit sales.
  8. Having a drop shipping relationship - You are having a third-party supplier who transports products to the consumer.

Steps to simplifying sales tax:

1. Identify where your nexus is: As your company expands, so do the activities that trigger the "sales tax nexus." Nexus simply means "Physical presence," and if you have sales tax nexus in a state, you must apply for a sales tax permit and start collecting sales tax from customers there. You must make sure that you are collecting sales tax in all of your nexus states as you diversify your sales channels, add staff, and establish drop shipping partnerships. 

2. Establish a sales tax collection system across all channels: When it comes to setting up sales tax collection, not all shopping carts are made equal. Some people make it look extremely simple, while others treat it as a complex one. If you are not careful, you may set up shop and start selling without being registered to collect sales tax in all your nexus states. Avalara’s platform can help determine if you are incorrectly collecting sales tax.

3. Use automation to simplify the sales tax process:
For retailers, the research, computations, filing, and reporting required for sales tax compliance are time-consuming, expensive, and error-prone. In today’s corporate landscape, the only option for businesses of any size to stay tax compliant is to establish a centralized, automated tax engine fully integrated with the company's Enterprise Resource Planning (ERP) system.

Avalara’s AvaTax solution offers sales tax policy configuration, calculation, remittance, and filing services.

Let us learn about how the sales tax nexus of multichannel sellers are evolving and provide tips on how to stay compliant as your business grows and thrives.

Thresholds For Sales Tax Nexus

There are two broad forms of nexus: physical and economic. The standards for establishing a sales tax nexus differ from state to state.

An office, warehouse, or retail location in a state, as well as workers or agents that are based there, can all create a physical nexus.

A business triggers an economic nexus when it sells a certain amount of goods or services in a particular state. While some states combine it with the total number of individual sales transactions, others base their calculations on the total dollar amount of transactions made.

By exceeding a state's minimum sales level, an economic nexus can be triggered. Several states consider this as their economic nexus level, this is sometimes known as the "$100,000 rule." This implies that if your company has a sales volume of $100,000 or more in each form, you have an economic nexus and are required to collect and pay sales tax in that state.

Wondering what to do if you trigger the sales tax nexus?

Here is a quick rundown of some actions that you can take if you have nexus.

Tax Permit registration in that state. You must register separately for the tax system of each state. You must visit the IRS (Internal Revenue Service) website. Another option is to register in 24 simplified states simultaneously using the online application form through the Streamlined Sales Tax Registration System (SSRS).

Collect sales tax from customers in that state. This includes total state taxes and any applicable county or local taxes. Usually, the tax rates are destination-based; that is, tax rates are calculated based on the customer’s location. Only a few states have an origin tax. In other words, you are taxed depending on where your business is located.

For instance, suppose you run an online business from Colorado and sell a product to a buyer in another region of the state. You collect destination-based sales tax at the customer's local and state tax rates since your state is destination-based.

Report sales tax to that state. Again, if you need information on how to file, go to the state's official website.

If you're selling in a tax-free state, check your local tax policies again. It is better to be cautious than to be sorry!

How do you know if your business is subject to sales tax in a particular state?

There are several ways to determine if your business is subject to a sales tax in a particular state. The first way is to check the laws of this state. You can often locate a state's sales tax laws online or by calling the state tax authority.

As businesses expand their sales to more states, it is vital to understand the nexus laws and sales tax exemptions in the states where the company sells.

Let us look at some of the exemptions to the sales tax nexus rules that apply to your business.

Exceptions to the sales tax nexus rules:

  1. Your company may qualify for a few exceptions to the sales tax nexus rules. Selling exempt things is one exception. In certain states, businesses are not required to collect and submit sales tax on exempt items like food or prescription medications.
  2. If you are offering services that are exempt from sales tax, there is another exemption. For instance, professional services like legal or accounting services are free from sales tax in several states.
  3. Ultimately, some states have what is known as de minimis law. This provision states that businesses must collect sales tax only on transactions over a certain amount. The threshold for this rule varies from state to state but is usually around $100.

The concept of sales tax nexus is critical for businesses to understand since it may have a notable effect on your business operations and can have a significant impact on your overall revenues. Nexus is formed when a company satisfies specific criteria, such as opening an office in a specific state or achieving a certain limit of sales in that state. There are various exceptions to the nexus laws, such as selling exempt items or services, but in general, if you have nexus in a state, you are required to collect and remit sales tax.

Sales tax for online businesses may be quite complicated, with laws and rates varying from state to state and product to product. It would be simple to maintain track of any tax liabilities your company has accumulated with the correct tax computation tools on its side. Fully integrated sales tax automation software, such as AvaTax, will reduce risk while improving efficiency and accuracy dramatically.

Avalara helps businesses of all sizes get tax compliance right. Please contact us if you have any queries about nexus or how to maintain your ongoing compliance.

Recent posts
Tax planning for business expansion in the U.S.: Best practices for Indian startups in 2024
U.S. sales and use tax guide for SaaS businesses in India
Market entry playbook: Launching your brand in the U.S. tax landscape

Prepare your business for e-invoicing under GST

Discover how to meet all compliance requirements while integrating e-invoicing into your tax function.

Prepare your business for e-invoicing under GST

Stay up to date

Sign up for our free newsletter and stay up to date with the latest tax news.