Decoding Nexus: An intro into the Complex World of Sales Tax

What in the Sam Hell is Nexus?

It's the connection between a business and a state that requires the business to collect and remit sales tax. Think of it as the threshold that triggers your sales tax obligations.

The Four Main Types of Nexus:

Physical Nexus: This is the most straightforward type. It exists when a business has a physical presence in a state, such as a store, office, or warehouse.

Economic Nexus: Thanks to the 2018 South Dakota v. Wayfair Supreme Court decision, most states now have economic nexus thresholds. Businesses no longer need to have physical presence to establish nexus. Now making sales or transactions over a certain threshold can establish nexus. This significantly broadened the scope of sales tax collection requirements for businesses making online sales.

Affiliate Nexus: If your business has an affiliate in a state, you might have nexus there, even without a physical presence or exceeding economic thresholds.

Click-through Nexus: This occurs when a business uses partners to refer customers to its website in exchange for a commission or other form of compensation.

The Perils of Ignoring Nexus:

Penalties and Interest: Late payments result in significant financial penalties and accumulating interest.

Back Taxes: States will pursue back taxes for the entire period you had nexus, not just from the date you were caught.

Legal Ramifications: In extreme cases, incorrect handling of sales tax can lead to criminal charges, including tax fraud and even jail time. Increasingly, states are holding individuals personally liable, not just the business itself. The podcast highlighted a NYC statute as a stark example.

Managing Nexus: A Proactive Approach:

Internal Expertise: Having someone within your company who understands sales tax is crucial. And giving them the right tools to manage sales tax is just as crucial.

External Expertise: Consider engaging a tax professional or using a managed service provider like Taxiom if your internal folks can't handle everything on their own, which there's nothing wrong with, this stuff is a lot to handle!

Compliance Tools: Utilize software and tools designed to help manage sales tax compliance across multiple states. As your sales tax landscape becomes more complex, it's almost always more cost effective to leverage software vs trying to have an internal employee do everything by hand.

Key Takeaways and Next Steps:

Ask Questions: Don't be afraid to seek help and clarification. Ignorance is not an excuse.

Accurate Reporting: Maintain accurate records of your sales and transactions, and register in states where you have nexus as soon as you establish it.

Due Diligence: For mergers and acquisitions (M&A), thoroughly investigate the target company's sales tax compliance history. A clean sales tax record is essential for a smooth transaction. Losing deal dollars because sales tax wasn't handled properly would be a waste of deal dollars.

Navigating the complexities of sales tax can be daunting, but by understanding nexus and taking a proactive approach, businesses can avoid costly mistakes and ensure compliance. Don't wait until you're facing an audit – take control of your sales tax obligations today!