9 Questions to Ask About Sales Tax Nexus
- Jul 7, 2015 | Tim Parker
Are you a business owner wondering about your sales tax responsibilities? Have you heard of nexus? Many small business owners haven’t, and, under the right circumstances, that can lead to serious financial headaches. How do you know if you’ve established enough of a connection in another state to put you on the hook for taxes?
It all comes down to physical presence. But because it’s tax law, of course it’s not that simple. Take the time to ask these questions to help you determine whether you have triggered nexus within a state.
1. Do you have an office in the state?
It doesn’t matter if the office was temporary or has been there for years. If you used that office to make money within a state, you created nexus within that state.
2. Do you have an employee?
If you have an employee doing just about anything that creates sales, you owe taxes. For the purposes of nexus, there is virtually no difference between an independent contractor and a regular employee. If someone who works for you, regardless of their official HR designation, brought money into your business, you’re on the hook.
3. Do you have a warehouse?
If you’re storing inventory in the state, whether in a tiny locker or a huge garage, you've got nexus. Even if it’s a room in your parent’s home. The amount of inventory doesn’t matter. Stored inventory probably establishes physical presence.
4. Do your products come from a distribution center in that state?
Where are your products shipped from? Remember #3 above? A distribution center and a warehouse are the same, although businesses may put different names on them. You probably owe taxes to the state where you product was shipped from.
If you're an Amazon seller and have signed up for Fulfillment by Amazon (FBA), you are a prime candidate for nexus via product in a distribution center (see #6 below).
5. Do you have a drop shipper in another state?
Maybe you have a relationship with a manufacturer or wholesaler to ship items directly from their warehouse to your customers. State taxing authorities aren’t going to let you off the hook. Wherever your product originates from creates nexus.
6. Do you store inventory at an Amazon Fulfillment Center?
Amazon has caused states to rethink their nexus laws. In fact, Amazon ended its Associates program in certain states when they ruled that Amazon had established nexus by working with individual sellers in those states and would have to collect sales taxes. If you have merchandise stored at a fulfillment center, you probably created nexus in that state.
7. Do you have affiliates?
Maybe you’re a fitness expert that sells a specially formulated energy drink. To increase sales, you set up an affiliate program where other people can send customers your way and in exchange, you give them a cut of the profits. In some states, like New York, you will owe sales taxes. Not all states define nexus this way, however, so look closely. Also, states are updating their position on this issue. Tennessee recently ruled in favor of click-through nexus.
8. Did you attend a trade show?
Even if you made sales at a trade show, craft fair, or food truck—without any permanent presence, you may have created nexus.
9. Do you sell online?
Remember, even if your store is virtual, taxes are all about physical presence. If you send a product from your home in Maine to a customer in New Jersey, you probably don’t have nexus. If, however, your mother helps you assemble your products from her home in New Jersey before you ship them to that customer, that creates nexus.
The subject of nexus is complicated because each state defines it differently. But when it comes to the law, ignorance isn’t bliss. Use a service like Avalara TrustFile to take the guesswork out of tax filings. And if you need help, contact a CPA or tax professional.