Are you in an e-commerce business, an online seller, and selling your products through Shopify, Amazon, or eBay in the United States? You need to know “what is sales tax nexus” in the United States. The consequences of being not aware of this topic could make you liable for a huge amount of sales tax liabilities including penalties and interest or on the other side you may have to lose a well-established business that you have created with your hard work. This topic has particularly become important since the decision given by the court in the case of S. Dakota v. Wayfair in June 2018.
What is sales tax nexus?
Nexus means a link or connection. The United States determines sales tax nexus based on the link or connection that a business has in a particular state or a tax jurisdiction. The determination of these links is usually based on factors like a physical presence, a helping hand for the business, employee or agent, or the volume of business, etc. Based on the strength of this link or connection, the state decides whether that business selling their goods or services in that state or tax jurisdiction is liable to collect and pay sales tax to the state or to the authority of that tax jurisdiction. Until a nexus is established, the state or the tax jurisdiction can not require you to register for sales tax, collecting and paying sales tax.
The U.S. Constitution mainly controls the determination of a nexus. The determination process is based on either the physical presence or economic connection or both, depending on the state.
So far, the above determination process differs from one state to another state. You may need to look into the particular state nexus requirement to assess your obligations for sales tax.
Below are the factors that are most commonly considered by states in the United States with respect to business having nexus with that state.
Seller’s physical presence
These factors may include occupying, maintaining, or using temporarily or permanently, indirectly or directly or through an office, an agent, a representative, a subsidiary, a business place, a distribution enter, a warehouse or storage place, sales or sample room, or place.
Seller not physically present
The amount of gross revenue derived from the state or the number of deliveries made to the state. Most commonly used is gross revenue $100.000 and the number of deliveries 200.
Having read the above complexities in the determining factors for the Nexus, differently used among states, is majorly contributed by the e-commerce business. E-commerce is a seller sitting in Quebec, Canada, and selling his products to a consumer in Florida over the e-commerce platform. It is difficult for a state or tax jurisdiction to define a nexus and control the seller in Quebec, Canada, to pay sales tax for selling his goods in Florida. Unless they (state or taxing jurisdiction) do so, the state keeps losing the sales tax revenue that they would have collected if the seller and the buyer were both from Florida.
Requirements for a Nexus in Online Transactions
Historically a nexus for sales tax purposes used to be established when a business had a physical presence in that state. The arrival of e-commerce has driven states to focus on online companies to stop the spillage of sales tax revenue for the state and the tax jurisdiction.
The Supreme Court finally gave its decision on the issue of online Nexus in the case of S. Dakota v. Wayfair in June 2018. The Court stated that older ways of determining tax nexus were artificial and now obsolete.
The Court indicated that states have a right to require online sellers to charge and collect sales tax from all online buyers, not just those physically located in that state.
Sales tax rate differs from one state to another state in the United States. Likewise, the nexus adopted by each state also differ. We are now going to discuss the most commonly adopted terms among the states based on which nexus is applied by a state. If you simply want to know the different sales tax rates by state, please visit our blog “Sales tax rate.”
Nexus for Sales Tax Purposes
Nexus is only discussed here for your sales tax obligations in the United States. Our focus is on the significant common conditions that are widely applicable to most states in the United States. Furthermore, the states in the United States are rapidly changing the interpretation of Nexus for their state as the state and local tax jurisdiction is trying to generate/increase their sales tax revenue.
After going through the nexus definitions of many states, we can focus on the most common areas widely considered by the states. It would be best if you found the nexus definition for particular states with which you are dealing.
Historical visible physical presence Nexus
Click-Through Nexus legislation
This is commonly used for a remote seller. The seller is considered to have sales tax nexus with the state when the seller’s gross revenue from the state is either meeting or exceeding the minimum threshold of revenue adopted by that state. A remote seller means an out-of-state seller who does not have a physical presence in the state but sells their products through a referral program.
Affiliate Nexus legislation
When a remote seller sells his products in the state without being present, however, he has a nexus through an affiliate. An affiliate may not need to be under common ownership or need not establish substantial interests. This could even apply when a remote seller sells identical or substantially similar products under identical or similar business names, or the affiliate business, or its facility or its employee is used for advertising, promoting, or facilitating sales of an in-state consumer.
Marketplace Nexus legislation
This applies to mostly e-commerce service providers like Amazon, e-bay that provides e-commerce platform and customer service, payment processing, and marketing services, which are considered to have Nexus in the state in which they are providing their services.
Notice and Reporting Requirements
In this situation, it is the retailer’s responsibility to collect the applicable state sales and use tax from the buyer, remit, and report to the tax authority. The seller may be required to inform purchasers and the state, with an annual statement of all their purchases from the retailer.
Under this condition, you may not need to have a physical connection to the state. This condition only applies to your number (volume) of sales and dollar values of the gross receipts. This Nexus is widely popular and applied by many states.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.