Sales Tax Nexus Guide
The concept of sales tax nexus has become somewhat complicated, particularly for online sales businesses that sell products in various countries and states.
A nexus refers to the connection between multiple entities and when it comes to tax, it refers to the relationship between a business and the taxing authority.
Simply put, before sales tax can be imposed a nexus must exist.
In this sales tax nexus guide, we will tell you everything about how tax nexus works and the different types.
More About What Tax Nexus Entails
When a business has a tax presence in a specific state it is called “nexus”. It is basically the affiliation between the business and the taxing authority that collects sales tax.
There are two clauses of the united states that constitute the derivation of a tax nexus:
- Due process clause – that requires a relationship
- Commerce clause – that requires a significant presence
The presence can be outlined differently for various types of taxes. This means that a business is physically present in a state, for instance, employing workers or owning and maintaining property within the jurisdiction. Having a nexus could also define the degree and amount of business dealings that must be present before the business’s income is taxable within that jurisdiction.
The taxpaying business must collect sales taxes and pay it to the tax authority if it has nexus there and the company must also pay income taxes on the sales generated in the jurisdiction.
How Does Tax Nexus Work?
Even though the definition of nexus can be different for various jurisdictions, it typically requires that the business entity must be committed to a particular type of action within the jurisdiction. You might have nexus in a particular region if you:
- Maintain an office in the area
- Employ staff
- Store inventory or products in a warehouse
In such a case, you will need to establish a sales tax rate for the location and collect it from customers in the area that buys from you. You will most likely pay income tax for the state as well.
Different Types of Tax Nexuses
Income Tax Nexus
Nexus is generally generated for income tax reasons if the business:
- Has fixed income from sources in the state
- Leases or owns property in the state
- Employs staff members in the state that conduct activities that merely exceed a solicitation
- Has property or capital assets located in the state
Sales Tax Nexus
Sales tax nexus is defined more loosely. A company may have sales tax nexus in the state if:
- It conducts business at a physical location within the state
- It employs resident staff members that work in the state
- It has a staff member who frequently conducts business there, like a sales representative
- It owns property in the state (including intangible property)
Types of Online Sales Nexuses
States have created various methods to assess a nexus for online sales.
- Click-through nexus – a direct link between the seller and the buyer. This can happen when the company in the state is paid a commission for referring transactions to out-of-state sellers via links on websites.
- Affiliate nexus – refers to affiliates which are independent companies that sell through affiliate businesses. For instance, the Amazon affiliates program is an excellent example. The affiliate does not work as an independent contractor or staff member but is actively linked with the business. This type of nexus usually requires a commission paid to the affiliate for referrals.
- Economic nexus – is the most basic way of assessing a sales tax nexus. It involves sales. The company may have economic nexus in the state if it has sales over a specified amount of threshold. For example, Idaho has a threshold of $100 000 in sales annually as the minimum threshold for establishing sales tax nexus.
Related: Taking the Stress out of Selling Online and Sales Tax
I hope this sales tax nexus guide has given you some insight into the world of sales tax and that it has given you the answers you needed going forward.