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Nexus Monitoring

Question 1

What is Nexus?

Answer

Sales tax nexus is the key concept that determines when a business, even without a physical presence in a state, becomes obligated to collect and remit sales tax. It essentially defines the minimum level of activity that triggers this tax responsibility.

Think of nexus as a “connection” to a state. If this connection exists, your business needs to register and collect sales tax from customers in that state. There are two main ways this connection can be established:

Physical Nexus: This is straightforward. Having a physical presence in a state, such as employees, offices, or warehouses storing inventory (including those used for fulfillment by Amazon or similar services), creates a clear connection and triggers nexus.
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Economic Nexus: This applies when your sales activity within a state reaches a certain level. This level is typically defined by either the number of transactions (order volume) or the total sales revenue you generate in that state.

Question 2

What is an economic nexus?

Answer

Even without a physical presence in a state, your SaaS business can still be on the hook for sales tax collection through a concept called economic nexus. This essentially means your sales activity within a state creates a tax obligation.

Economic nexus is typically determined by two main factors:

Sales Volume: Many states have a minimum sales revenue threshold within a year that triggers economic nexus. This threshold can vary significantly by state, but a common benchmark is $100,000 in annual sales.
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Transaction Volume: Some states, in addition to or instead of a sales revenue threshold, use a minimum number of transactions within a year to establish economic nexus. This number can also vary by state.

Question 3

What is a physical nexus?

Answer

Physical nexus refers to a business’s physical connection to a state. Traditionally, this has been the primary trigger for sales tax collection obligations. If your SaaS company has a physical presence in a state, you may need to collect and remit sales tax on your sales there.

Here are some examples of activities that can create physical nexus:

Storing inventory or maintaining a warehouse: This includes goods sold through online marketplaces.
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Owning or leasing an office: Even a single office or a mailing address can establish nexus.
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Having employees or independent contractors: This applies to both full-time and temporary workers.
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Having affiliates: Partnering with local affiliates can create nexus.
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Temporary business activities: Participating in trade shows or using sales representatives with an in-state presence could be enough.

Question 4

What is an affiliate nexus?

Answer

Affiliate nexus arises when a business partners with another company that has a physical presence in a particular state. This “affiliated” business could be a subsidiary, co-branded venture, or simply share common ownership.

If affiliate nexus applies, the online business might be required to collect and remit sales tax on transactions resulting from the partnership, even with no physical presence in that state.

Question 5

What is a click-through nexus?

Answer

Click-through nexus occurs when an online business partners with a third-party seller or referral agent residing in a specific state. This referrer could be an influencer, blogger, or any entity directing customers to the online business’ website or products in exchange for a commission.

The key factor is the referrer’s physical presence within a state. If click-through nexus applies, the online business might be responsible for collecting and remitting sales tax on sales generated through the clicks or referrals from this third party, even without a physical presence in that state.

Question 6

What should I do when I have nexus?

Answer

If your SaaS business has nexus (either physical or economic) in a state, you’re generally responsible for collecting and remitting sales tax on your sales to customers in that state. Here’s a breakdown of the process:

Sales Tax ID/Seller’s Permit: The first step is to register with the state and obtain a sales tax ID or seller’s permit. This allows you to legally collect sales tax from customers.
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Sales Tax Collection: Once registered, you’re obligated to collect the appropriate sales tax rate on all taxable sales to customers within that state. This tax is typically added to the customer’s invoice or purchase price.
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Sales Tax Returns and Remittance: You’ll need to file regular sales tax returns with the state. These returns report your total sales within the state and the amount of sales tax collected. You’ll also be responsible for remitting the collected sales tax to the state according to the filing schedule.

Question 7

Can a non-US business have nexus?

Answer

The rules for establishing sales tax nexus, both physical and economic, apply equally to businesses regardless of their location. A foreign company operates under the same regulations as a domestic one.

Here are a couple of scenarios to illustrate this point:

Foreign 3PL and Nexus: A UK business using a 3PL fulfillment center in a state creates nexus in that state, just like a US business with a physical presence there. Both would be required to register for a sales tax permit and collect tax on applicable sales.
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Sales Volume Triggers Nexus: A California company exceeding the sales revenue threshold ($100,000 is a common benchmark) for economic nexus in Florida would be responsible for collecting sales tax on sales to Florida customers, just like a German company exceeding the same threshold. In both cases, exceeding the sales volume creates economic nexus and triggers the obligation to register and collect tax.

Question 8

What’s the difference between income tax nexus and sales tax nexus?

Answer

Triggering a Tax Obligation:

Income Tax Nexus: This determines when a business must pay income tax to a state. It’s generally triggered by having a physical presence in a state, such as an office or employees.
Sales Tax Nexus: This establishes when a business needs to collect and remit sales tax on its sales to customers in a state. It can be triggered by physical presence, but also by exceeding a certain threshold of sales activity (volume or revenue) within the state, even without a physical footprint.‍

Focus of the Tax:

Income Tax Nexus: This focuses on the income a business generates, regardless of where the sale takes place.
Sales Tax Nexus: This focuses on the sale of goods or services to customers located within a specific state.

Overall Impact:

Income Tax Nexus: Generally has a less significant impact on most businesses, especially those operating solely online.
Sales Tax Nexus: This can have a more significant impact on online businesses, as it can create tax collection obligations even without a physical presence in a state. This can be complex to manage and requires careful monitoring of sales activity across different states.

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