Like most things in America, the US Constitution controls how the government is allowed to tax its citizens. The Founding Fathers’ approach was to require a definite link between a state and the entity it wants to tax, and being scholarly folk, they chose a Latin word to signify this link: NEXUS.
So, What Does Nexus Mean?
Nexus means ‘connection’, and it is the legal test that states must use to implement tax laws. Every state has its own sales tax requirements and each can prescribe its own definition of sales tax nexus that compels a business to comply with their laws.
Physical vs Economic Nexus
Historically, states were only allowed to use physical tests to determine nexus. For example, having an office or warehouse, employees or even contractors in a state can create what is called Physical Nexus. However, a landmark ruling by the US Supreme Court (South Dakota v. Wayfair, 2018) eliminated the physical presence rule as the standard for creating nexus in a jurisdiction and gave states the right to implement Economic Nexus rules. Instead of focusing on whether the business has a physical presence, states can look at their business activity.
The number of transactions or amount of revenue a seller has in a state is now the determining factor for states to compel compliance. The result is a wave of “remote seller” registration obligations.
In-State vs Out-of-State Sales
Previously, if a New York-based business sold to California but didn’t have a physical presence, they were not obliged to register in California. Now, if the NY business breaches the threshold imposed by California – they are said to have Economic Nexus and must register for sales tax and start charging Californian sales tax rates on eligible transactions. The concept of remote sellers having to register is not limited to US businesses – non-US sellers are also subject to Nexus rules and might be legally obliged to comply.
How to Manage Nexus Compliance
ALL businesses around the world must understand the nexus requirements in the 47 US states (including DC) that have sales tax and ensure that if their business activity or setup creates physical or economic nexus, they register immediately.
1. Monitor Nexus Activities
Keeping track of your business activities is key to managing nexus compliance. Here’s how to stay on top of it:
- Track your sales: Keep an eye on where your sales are happening. This will help you spot when you’re getting close to nexus thresholds in different states. Most modern accounting systems can generate detailed reports that break down sales by state.
- Leverage technology: Consider using nexus tracking tools. Platforms like ours can automate the monitoring process, helping you stay updated on your nexus status with minimal effort.
2. Register for Sales Tax
Once you’ve identified that your business has nexus in a state, it’s time to register. Here’s a straightforward approach:
- Check the state requirements: Each state has its own rules for sales tax registration. Visit the state’s Department of Revenue website to get the specific requirements and forms.
- Fill out the forms: Complete the sales tax registration application for each state where you have nexus. You’ll need to provide details about your business, including contact information and your tax ID number.
- Get your permit: After submitting your application, you’ll receive a sales tax permit. This permit allows you to collect sales tax from customers in that state.
- File on time: Stay on top of filing requirements for each state. Depending on the state, you may need to file monthly, quarterly, or annually. Make sure you meet all deadlines to avoid penalties.
3. Stay Updated
Nexus laws can change, so it’s crucial to keep up with the latest updates.
Regularly check for updates from state tax agencies or legislative bodies. Subscribe to their newsletters or alerts to get the latest news on changes that might affect your business. It’s a good idea to talk to tax professionals who specialize in sales tax and nexus. They can offer valuable advice and help you navigate complex issues.
Conclusion
Navigating US sales tax nexus can be a complex and daunting task for businesses, especially with varying requirements across states and evolving laws. Without proper monitoring and compliance, businesses risk costly penalties, missed deadlines, and a tangled web of tax obligations that can strain resources and impact operations.
By staying proactive with tracking tools, understanding registration processes, and keeping informed through expert advice and industry updates, you can effectively manage nexus compliance.