How Does Sales Tax Nexus Impact Your Business?February 3, 2022
If you’re a business owner, it’s important to understand the concept of the sales tax nexus by state and how it affects your operations. Nexus is determined by whether or not your company has a physical presence in a state. You’re required to collect and remit sales tax on taxable items sold in that state if you do. Determining nexus can be tricky, so it’s important to consult with an accountant or tax professional to make sure you’re compliant. Ignorance of the law is not an excuse! This article explores how nexus affects businesses and provides tips on avoiding having nexus in states where you don’t want it.
What is Sales Tax Nexus?
Nexus is a legal term that refers to the connection between a business and a state that requires sales tax collection. For a business to be required to collect sales tax in a state, the business must have nexus in that state. Nexus can be established in several ways, including having a physical presence in the state, using an affiliate or representative, or engaging in certain types of economic activity in the state.
How does Sales Tax Nexus Impact your Business?
Having nexus in a state means you must collect sales tax on taxable items sold to customers based there. Not having nexus can help your bottom line because it prevents the business from charging and remitting local taxes for transactions between two other businesses. Still, it also creates additional compliance burdens that could result in penalties if not followed correctly.
Who is Affected by Sales Tax Nexus?
Nexus affects all businesses that sell taxable products or services in a state where they have nexus, regardless of the size of the business. This includes online retailers and marketplace providers who may not be required to collect sales tax under current rules but whose activities can create nexus for other sellers doing business through their platform. It also includes companies with brick-and-mortar stores as well as those operating entirely online—even if you do not currently have a physical presence in certain states, your customers could establish nexus on your behalf! Suppose this has happened to you already (it probably has). In that case, there are ways around it, like using automation software like Avalara, which automatically calculates taxes depending on the buyer’s shipping address.
How to Avoid Sales Tax Nexus in Your Business
There are a few ways to avoid having nexus in states where you don’t want it. The most common way is not to have a physical presence in those states. This can be done by operating your business out of state, using an affiliate or representative in another state, or through eCommerce alone. If you have a physical presence in other states, there are other ways to limit your activities, not create nexus. You can also use automation software like Avalara, which automatically calculates taxes depending on the buyer’s shipping address.
The Future of the Marketplace Economy and Sales Tax Nexus
As more and more businesses move online and into the “marketplace economy,” sales tax nexus is becoming a bigger issue. The marketplace model allows consumers to buy products or services from companies they may not have previously transacted with and to discover new sellers without visiting their physical locations. This leads buyers in low-nexus states (meaning those that don’t require businesses to collect sales tax) into thinking there are no consequences for buying online—that anything purchased over the internet will be free of state taxes!
Sales tax nexus is a complex issue that can be difficult to understand. It’s important for business owners and marketers alike to know how it impacts them, who is affected by sales tax nexus, and how to avoid it in their businesses, so they don’t get caught off guard when the Marketplace Economy changes in the future. We hope this article has helped you understand what sales tax nexus means for your particular company or brand.