What is Sales Tax Nexus? Sales tax nexus refers to the connection between a business and a state or jurisdiction that creates a legal obligation for the business to collect and remit sales tax on taxable sales within that area. Nexus is established when a business has a sufficient presence or economic activity in a state. Understanding and managing nexus is critical for businesses to ensure compliance with varying state tax laws and avoid potential penalties. Numeral is here to help you navigate this!
Types of Sales Tax Nexus
Physical Nexus: A traditional standard based on a business having a physical presence in a state, such as a storefront/brick-and-mortar store, warehouse, office, or employees. If a business maintains inventory or employs workers in a state, it triggers a physical nexus, creating a requirement to collect and remit sales tax in that state.
Economic Nexus: Established when a business reaches a certain level of sales, transactions, or revenue in a state, even without a physical presence. Following the Supreme Court's ruling in South Dakota v. Wayfair (2018), states can mandate sales tax collection if a business exceeds thresholds like $100,000 in revenue in sales and/or 200 transactions. This economic standard has been widely adopted across states, but can vary. Some states adopt higher revenue thresholds (California and New York establish $500,000.00 in revenue, for example), while others do away with the 200 transactions threshold.
Implications for Businesses
Establishing sales tax nexus obligates businesses to comply with complex tax laws across multiple jurisdictions. The impact includes:
Compliance Costs: Businesses must register for sales tax permits, calculate, collect, and remit taxes accurately, and file returns in each nexus state. This involves significant administrative efforts and costs, especially for businesses operating in multiple states. Numeral offers end-to- end registrations for a one time fee of $150 per registration.
Penalties and Interest: Failure to comply with sales tax obligations can result in substantial penalties, fines, and interest charges, adding to the financial burden.
Competitive Disadvantage: Non-compliance or errors in managing sales tax obligations can lead to higher operating costs, putting businesses at a competitive disadvantage compared to those that manage their nexus obligations correctly.
Reputational Risks: Non-compliance can also damage a company's reputation, affecting customer trust and business relationships.
Steps to Ensure Compliance
Identify Nexus Locations: Determine where your business has a sales tax obligation by evaluating physical presence, sales volume, and other economic activities. Review state-specific thresholds and rules regularly. Numeral offers a Nexus Study free of charge, which will allow you to understand where your business has a potential sales tax liability.
Register for Sales Tax Permits: After determining nexus states, register for sales tax permits in each relevant jurisdiction. This is a prerequisite for legally collecting and remitting sales taxes.
Collect and Remit Taxes: Charge customers the appropriate sales tax rate for each nexus state, track collected taxes, and remit them according to the filing schedule of each state. The Numeral team can handle all of your prospective sales tax filings, as well as take care of any potential backfilings you may need.
Maintain Detailed Records: Keep comprehensive records of all transactions, sales invoices, and taxes collected to support compliance efforts and prepare for potential audits.
Stay Updated on Tax Laws: Sales tax regulations are frequently updated. Continuously monitor changes in state sales tax rates, nexus thresholds, and other requirements, or work with a qualified tax professional to remain compliant.
Understanding and managing sales tax nexus is crucial for businesses utilizing Numeral's sales tax automation services. Staying informed and proactive about nexus laws can help businesses streamline compliance, reduce costs, and avoid penalties, ensuring smooth operations across various jurisdictions. We’re happy to help you!