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 register, assess, collect and remit sales tax. Think of nexus as a threshold that triggers your sales tax obligations.

It doesn't matter how a business establishes nexus, whether it's physical, economic, affiliate, or click-through, when nexus is established, a business should get registered.

Why? Because businesses are playing in the states playground and have to follow their rules.

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, employee, 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. Many states have separate thresholds for affiliate and click-through nexus.

The Perils of Ignoring Nexus:

Penalties and Interest: Not registering on time can lead to penalties, fines, and needing to do backfilings (amended returns) to provide the filings that were missed.

Back Taxes: States will pursue back taxes for the entire period you established nexus initially, 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. States can hold individuals personally liable, not just the business itself.

Managing Nexus: A Proactive Approach:

Internal Expertise: Having someone within your company who has a basic understanding of 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: Consider utilizing 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.

Technology won't replace the employee, but it will allow them to better manage sales tax.

Lastly....

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.

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 to take control of your sales tax obligations!