Know your nexus

‘Nexus’ refers to the connection between a business and a U.S. state that triggers an obligation for the business to register for, collect, and remit U.S. sales tax. Nexus obligations are most likely triggered in the two following ways: 

• Physical nexus is established if your business has a physical presence in a state — in the form of an office, warehouse, or distribution center, for example. Attending events, employing remote workers, and even advertising can also establish physical nexus in some states. Our Know Your Nexus guide can help you learn more.
• Economic nexus can be established if a business makes a certain number of transactions or reaches a certain amount of revenue within a state — the rules and thresholds vary from state to state — even without a physical presence. This ruling is a result of the 2018 South Dakota v. Wayfair, Inc. United States Supreme Court decision. 

If you trigger an obligation to register for U.S. sales tax, charging the correct tax rate for the relevant tax jurisdiction is essential. Overcharging your customers will likely lead to bad customer experiences and loss of business, while undercharging could lead to an audit by state tax authorities. 

A U.S. state tax authority won’t warn a business before economic nexus has been established — they may not make contact until a considerable amount of back taxes are owed. Businesses should therefore take responsibility for tracking their sales so they know when thresholds have been breached and when they must register for U.S. sales tax. 

It’s possible for businesses to establish nexus in a state unknowingly, and therefore fail to remit taxes when they’re owed. If you discover your business has incurred a tax obligation, and you never registered for or remitted U.S. sales tax, you can minimise risk with a voluntary disclosure agreement (VDA).

VDAs are designed to encourage tax compliance by reducing penalties for unremitted taxes. Essentially, in return for voluntarily coming forward and admitting that you owe taxes, the state tax authorities may offer allowances such as reduced noncompliance penalties, or limit the ‘look-back’ period (the length of time a state can hold a taxpayer liable for unpaid tax).

If you become aware of a tax obligation you’ve been failing to fulfil, it’s beneficial to come forward as soon as possible and volunteer the information to the applicable tax authorities — if you’re approached by the tax authority before you approach them, a VDA will no longer be possible. Without a VDA, you’ll be subject to full noncompliance penalties. Although these can differ between states, additional penalties can be as high as 50% of the back taxes owed. Interest may also be charged.

The complexities of U.S. sales tax can seem like an obstacle to success in the U.S. market. Five key steps to get and stay U.S. sales tax compliant can help you overcome the challenge: 

1. Research: Thoroughly research the tax rules of any state where you may establish nexus.

2. Registration: If you establish nexus in a state, register for U.S. sales tax promptly.

3. Calculation: Once registered, use effective tax calculation software to apply the correct tax rates to transactions.

4. Tracking exemptions: Some transactions may be exempt from sales tax; tracking and recording these is crucial.

5. Remittance: Always remit the correct amount of collected taxes on time.

Automation and digital solutions are becoming essential to getting and staying tax compliant, especially in markets with thousands of varying rates and rules. Avalara AvaTax can help you stay up to date with the requirements of thousands of U.S. sales tax jurisdictions. It can also help you identify where new tax obligations may emerge by allowing you to view a heat map that tracks the volume and location of your sales.

The Avalara sales tax risk assessment is another helpful resource for identifying your tax obligations. If you provide some basic information on your company’s activities, we can give you an estimate of your U.S. sales tax obligations by location to work out where you have nexus now and where obligations may appear in the future.

With so many rates and rules, staying on top of your U.S. sales tax obligations can be a huge challenge. In our upcoming webinar, Avalara experts will help remove the guesswork and show you everything you need to know about U.S. sales tax obligations.

Featuring expert insights from Avalara Senior Directors Sacha Wilson and Phani Krishna, Nexus: What it is and why you need to know about it on Thursday, October 12, 2023, at 11:00 a.m. BST/3:30 p.m. IST can help you succeed in the U.S. market.