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How Economic Nexus Affects Your Business

  • Business
  • March 24, 2015 | Ryan O'Donnell

Before the internet was created, paying taxes was relatively easy. You paid the tax where your business sold products and services. For example; if you were based in New York, you paid that state’s taxes and if you were in Texas, you paid their taxes. This was because you needed a physical presence in each state you sold products in to achieve anything.

Mail order business in the late 1800s (Tiffany's, Montgomery Ward, and Hammacher Schlemmer are good examples) led to state governments beginning to question the definition of "physical presence". The rise of the internet and e-commerce has only strengthened the position of state governments as merchants quickly and easily have access to a state population from anywhere in the US. This has all led to the sales tax management and filing process being that much more challenging.

What Is Nexus?

“Sufficient Physical Presence”, otherwise known as Nexus, is a legal term that relates to the requirements a business has to collect and pay their taxes in a state. Before the days of ecommerce, this was relatively straightforward. Now, states are finding new ways to collect taxes on sales and income from businesses selling their products and services virtually.

The US Supreme Court held in 1967 and 1992 that states should not collect taxes from sales if the retailer does not have a physical presence in the state. These two court cases should have been an end to the practice but states changed tactics.

To get around these rulings, states are replacing nexus with economic nexus. This is where they claim there are financial dealings within their state, even if there is no physical presence. Amazon is at particular risk. The company pays sales tax in 19 different states, though it only has a physical presence in a few. This is because of their affiliate systems, which some states, like New York, state creates an economic interest in their tax area.

Another example would be in Michigan. This state will collect taxes if the business is actively seeking sales in the state and if they reach or exceed $35,000 worth of sales.

Other states are applying their own unique definitions of economic nexus. This can make it difficult to know whether you are supposed to pay taxes or not.

Efforts To Bring Order To Chaos

The senate passed a bill in April 2013 that required all online retailers to collect and remit sales tax in states where they have more than a million dollar revenues. This would provide a single standard for all sales tax laws, which would make it easier for businesses.

There has also been a considerable effort to establish a Streamlined Sales and Use Tax Agreement. This would standardize and simplify state tax laws, making it easier for businesses to know what they were responsible for. Of the fifty US states; twenty-four have signed this agreement so far.

What Does Economic Nexus Mean For Your Business?

If your business operates in multiple states, especially if you sell products online, you need to be aware of all current and future state tax laws. Some of these will impact how you pay taxes and to whom.

If you don’t keep an eye on the state tax laws, you could end up paying a fine when you don’t file a sales tax return when you are supposed to. You should pay extra attention if you have stock being sold through an Amazon fulfillment scheme.

Conclusion

Economic Nexus is a tricky situation for your small business. It refers to the responsibilities of your business to pay taxes in states where it operates or sells its products; even if there is no physical presence. This can make it difficult for businesses to know what tax returns it must complete and requires you to pay special attention to all the tax requirements in another site.

To help you, you should also monitor changes to the tax requirements in each state you operate, to ensure you aren’t unnecessarily paying taxes to a state.

Have you been caught out by economic nexus? What economic nexus taxes do you pay?

Tell us about your experiences in the comments below.


Avalara Author
Ryan O'Donnell
Avalara Author Ryan O'Donnell