In 2018, a landmark tax decision was reached. South Dakota vs Wayfair set the tone for state sales tax law in the United States. Word got out to the states, there was a slice of ecommerce pie to be had. Now, states have the right to collect sales tax from non-residential companies. The case complicates accounting for virtual retailers. As a business owner you need to have a grasp on which state to pay. This is known as states where you have “nexus.”
This article explores everything you need to know about sales tax nexus:
- What defines nexus status
- How to navigate the states where you have nexus
- Performing a nexus study
- Paying sales tax
- What can happen if you commit sales tax fraud
What is Sales Tax Nexus?
From the perspective of a brick and mortar store, sales tax law is fairly simple. You collect and remit sales tax based on the locality of the store. The minute commerce crosses state lines, we enter nexus territory. In the case of ecommerce, where sales are made over the internet, sales tax has to be collected and remitted. But to who?
In the United States, paying sales tax is enforced by individual state jurisdictions. By law, all businesses must collect and remit sales tax for goods and services. Having “nexus” means you have a sufficient presence in that state. Since South Dakota vs Wayfair ruled that states can collect sales tax from a business with no physical presence, each state determines their own nexus rules.
In general, nexus is determined by the location of the business (physical presence), or the amount of sales (economic presence). However, there are a lot of complexities surrounding nexus status. This is how to figure out if you have sales tax nexus:
Physical Presence
- Physically located in the state
- Having an office or paying rent for a space
- Having an employee and in some cases independent contractors
- Having a warehouse or storing inventory
- Having an affiliate that conducts business on your behalf
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
Economic Presence
- Economic Connection AKA Remote Sellers Nexus: Making a certain amount of sales or transactions in a state.
- Click-thru Nexus or Affiliate Nexus: An affiliate program in another state, that forwards business to you (via a link/click or otherwise). When the person you market with is in a state you have no connection with, you have nexus in that state. Only some states require you to pay click-thru sales tax.
- Drop Shippers Nexus: This is a nexus situation, not a tax filing term. With two sales being made for drop shipping, businesses could be liable for two sales tax payments. Doesn’t always mean nexus, but in some cases can.
The Nexus Study
Based on the definitions above you should have an idea of which states you need to track. Here is how you perform a nexus study:
- Know your sales tax nexus state: Check each state tax authority guidelines.
- Know local rules: Beyond knowing state sales taxes, you need to know the various local rules. Some cities have higher tax rates than others.
- Origin Based Sales Tax: Where you apply one tax rate for any sales within the state.
- Destination Based Sales Tax: Where you apply tax rates based on where an item is being delivered. These rates could potentially be broken down into state, city, county, and/or district.
- No Sales Tax: There are a select few states where there is no statewide sales tax. This doesn’t mean local municipality taxes don’t apply.
- Setup your sales system: Automated tax rates are the way to go. Most online retail platforms will monitor nexus rates for you. If you need additional help, TaxJar or Avalara are recommended.
Paying sales tax in different states?
This is how you pay sales tax where you have nexus:
- Register: A business must register for a sales tax permit in the states where they hold nexus.
- Payment: Calculate how much sales tax you owe, and file with your nexus state.
- Cancelling a Permit: When a business no longer holds nexus, the permit must be cancelled. Cancelling does not immediately absolve a business from sales tax payments. Some states retain the right to collect a trailing nexus.
Just Pay: Sales Tax Evasion
There are many stories in circulation, about not paying sales tax. That may have been the case in the past, when the internet was the wild west. Now, sales tax laws are complex and generally favor the state. State jurisdictions take sales tax compliance very seriously. These funds are allocated to a wide array of state programs like: roads, fire departments, education, arts and culture programs, etc. Needless to say they are on the lookout for non compliance. Outsmarting the system will take more work than paying.
Sales Tax Assessment
Consumer reports are often the downfall of a company not charging sales tax. Most state agencies have a hotline for the public to report. If your business gets reported, a secret shopper will make a test purchase. If no sales tax is collected, the business is liable for an audit. They’ll run a historical review of business conducted in the state. If a state audit finds a business guilty of sales tax evasion, they will send out an assessment letter with an estimated sum of back pay. These dues will include late/non payment penalties and interest.
Penalties
The majority of sales tax convictions result in a misdemeanor charge and a fine. When a business intentionally commits sales tax fraud, it is a different story. Each state writes their own penalties for tax fraud cases. Most states increase the penalty from a misdemeanor to a felony where the unpaid amount is over $10,000. When the charge is increased to a felony, the penalty includes a hefty fine and possible jail time.
Collecting and Not Remitting
If you have not reached the threshold for nexus in a state, you have no obligation to charge sales tax. Much like driving without a license, collecting and not remitting in a state where you don’t have a sales tax license, is subject to penalty. If by accident you collected and you realized the oversight, don’t push it under the rug. Best case scenario you return the money to your customers, and suffer a small fine. Talk to an accountant or tax representative about how to rectify the situation ASAP.
When in Doubt Hire a Sales Tax Consultant
By now you should know the states where you need to pay sales tax, based on your nexus study. Collecting and remitting will get easier with time. If you are having difficulty determining nexus for your business, consult a sales tax accountant. Especially if you are facing an assessment. Otherwise, bookmark this as the place to find everything you need regarding sales tax.
