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What Is Tax Nexus?

“What is nexus?” It’s one of the top questions from small business owners. This set of tax laws is complicated, so we’ve put together a quick guide to get you started.

Nexus: The Basics You Need to Know

Nexus is your business presence in a state that’s strong enough to allow the state to collect sales tax from you. If “presence” sounds a little vague, that’s because states set their own rules for what counts. Offices, storefronts, and warehouses are obvious examples. A booth at a trade show or a remote employee (even freelancers in some cases) can also create nexus. We’ve compiled a checklist to help you determine your nexus areas.

If you have nexus in a state, add the state sales tax rate and any local taxes to determine how much to collect from each sale you make there. You should also read up on when your nexus expires so you don’t send in tax money longer than you need to.

As you can imagine, the more states you have nexus in, the more complicated and time-consuming filing sales tax gets. Especially for small businesses, which have fewer employees to tackle the paperwork, it’s important to have a system in place to help get sales tax returns out on time. Luckily, it's something you can automate.

Hey, I Don’t Have Physical Presence There!

Let’s say you’re the CEO of a skiwear store that’s based in Colorado. To increase online sales, you work with affiliates in New York and Vermont to promote your knit hats and snow goggles. When the next tax deadline rolls around, your accountant says you owe taxes in both of these states, even though you’ve never set foot there. What gives?

You’ve just encountered affiliate sales tax law, otherwise known as click-through nexus. Blame the bottom line for this law. Many states are struggling to fund their budgets. The online marketplace is an attractive potential source of income. So 19 states and counting have passed laws to the effect that an affiliate partner’s presence can create nexus for you.

The One Company That’s Changing Nexus for Everyone

No single company has affected the online marketplace as much as Amazon. More and more online sellers are using the giant to host their sales platforms. If you’re one of them, Amazon’s company decisions can affect your sales tax obligations. Specifically, you’ll need to pay close attention to where your inventory is stored.

You don’t want to be overly conservative and send taxes to every state that has an Amazon Fulfillment Center. Instead, schedule periodic check-ins to track where Amazon’s keeping your products. As warehouses open in new states, add them to your checklist so you’re not caught off-guard.

Tax nexus is a complex topic, but it’s important for your business. Make time to follow which states need tax returns from you, and you’ll help keep your company running smoothly.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Jessica Sillers
Avalara Author Jessica Sillers