How does this affect your online sales?

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The term nexus indicates a relationship between a company and a tax authority. Learn more about the different types of links and what they can mean for your small business.

One of the most frustrating parts of starting a business is figuring out what taxes you are responsible for. This can be especially confusing with sales tax. Where should you pick it up? Do you only need to collect sales tax in the state where your business is located? What about online sales? If your business is located in Nevada, do you have to collect state sales tax from an Illinois customer?

This is where the tax nexus comes in. The definition of link is “a link or series of links connecting two or more things”. Keeping this definition in mind, fiscal nexus is the relationship or connection that a business has with a taxing authority. If you are not selling out of state, your tax nexus will only be with your home state’s tax authorities.

Simple enough, right? But as online sales have grown, the tax nexus has become murkier, with many online sellers continuing to only collect taxes from their home state. And as more residents shopped online, more states grew concerned about the resulting drop in sales tax revenue and began pushing for a tax collection process. sales tax more inclusive.

Their concerns were addressed in the 2018 Supreme Court case South Dakota v. Wayfair, which established an economic nexus for companies selling online. As a result of this decision, physical presence and economic presence are now used to link to sales tax. A company may have a physical presence and/or an economic presence in a State to establish a tax nexus.

Presentation: what is a tax nexus?

A tax nexus is simply a link established between your business and a tax authority. For example, you open a small retail store in Chicago. Your sales are limited to in-state transactions because you don’t have an online presence. Your sales tax tie is the state of Illinois and possibly the city of Chicago. You may also have a tax connection to any county in Illinois that may impose taxes.

If you sell your products out of state, then you will establish a tax nexus with the states where you sold products.

Maintaining the tax nexus properly is fairly easy if you only sell locally, but things get more complicated when online sales are introduced. When more than one tax nexus is introduced, many business owners turn to sales tax software, which can simplify the entire sales nexus by reviewing state nexus laws and other potential link issues.

How does this type of tax work?

Fiscal nexus is not a type of tax, but it determines whether there is a relationship between a company and a tax authority. Each state defines the fiscal nexus, with the specifics of the relationship constantly changing. Unless a tax nexus is established between your business and a particular state, you do not have to collect and remit sales tax to that taxing authority.

3 types of fiscal link

There are three main tax linkages that small business owners should be concerned about.

1. Link to sales tax

The sales tax connection is the easiest to establish, with a variety of circumstances capable of establishing a connection, including:

  • A physical presence in the state
  • Employment of state residents in the enterprise
  • The property belongs to the state
  • The inventory is maintained as is
  • Business is conducted in the state regularly

For example, Kate owns an interior design business in New Mexico. Although his company is located in New Mexico, his salespeople regularly solicit business from Colorado residents, establishing a connection to the state. Because of this connection, if Kate accepts a commission in Colorado, her clients will have to pay Colorado sales tax.

List of things that can bind to a state.

Workers, goods, warehouses and inventories are all elements that can create an economic or fiscal link with a State. Image source: author

2. Online or economic link

When online sales began, businesses collected sales tax only from residents of the state where their business was established. But due to South Dakota v. Wayfair, previously mentioned, companies are now required to establish an economic nexus with any state in which they do business, whether or not they have a physical presence in the state.

And since most states have different login requirements, each state will need to be addressed separately.

3. Link with corporation tax

The connection to corporate income tax is more confused than the other two. In Kate’s case, her proximity to Colorado will likely result in a nexus for income tax purposes. An income tax nexus may occur if you derive in-state income. And because Kate has many clients who reside in Colorado, it’s likely that her income from Colorado residents will establish a tax nexus with the state that will need to be addressed on her tax return.

Of course, since her business is in New Mexico, Kate also has a tax nexus there, which will need to be filed with her personal or business tax return.

How a tax nexus can affect online sales

Prior to the establishment of the economic nexus, retailers were only required to collect sales tax from state customers. Today, except for four states: Delaware, Montana, New Hampshire and Oregon, all states have established an economic nexus, with laws in Florida and Missouri pending.

Map of the United States highlighting states with and without economic nexus rules.

With the exception of a few states, most states have some level of economic tie. Image source: author

While building a sales link online doesn’t impact sales, it does affect your business. If you are dealing with an economic bond for the first time, these tips can make your life easier.

1. Identify the states where you might have an economic connection

In any state where you have sales, you can have an economic link. Since every state is different, you will need to determine the states where you are selling and then find the sales threshold established in that state.

For example, Colorado has a sell threshold of $100,000 or 200 transactions. So if you have more than $100,000 in sales in Colorado or more than 200 sales transactions, you will need to start collecting sales tax from your customers. Keep in mind that the threshold in most states includes the totals for the current year and the previous year.

2. Make sure you collect the correct amount of sales tax

Since sales tax is paid by the consumer, it is up to you to collect the appropriate sales tax from your customers, keeping in mind that if you do not collect the appropriate amount, your business will be liable. of the balance due. For example, ABC Sports collected 5% sales tax from its customers, but the actual sales tax rate is 5.75%. Because they haven’t collected enough from their customers, ABC has to make up the difference.

3. Use sales tax software

If this gives you a migraine, you’re not alone. That’s why more and more businesses are turning to sales and using tax software to simplify the entire sales tax tie-in process. Different from tax preparation software, sales tax software can help identify the link, while ensuring that you collect the correct tax from your customers.

If you need to collect and remit sales tax for more than one state, sales tax software can be a lifesaver. Sales tax software can also help resolve potential issues such as tax exemptions and local tax nexus.

Some Final Thoughts on the Fiscal Nexus

To stay compliant, you need to understand the tax nexus. Tax nexus simply means that you have a relationship with a tax authority. It is up to you to manage this relationship appropriately knowing the requirements of each of the tax authorities. The easiest way to do this is to use sales tax software, which helps you relate, collect the correct sales tax, and remit the tax due to the appropriate tax authority.

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David A. Albanese