When it comes to sales tax, Nexus is one of the most important things to understand and get right.
Nexus Definition – “A connection or series of connections linking two or more things.”
In the world of sales tax, Nexus is when your business is linked or connected to the US states. There are three main ways your business can be connected or linked to the states creating Sales tax Nexus.
| 1. Physical Nexus | This is when your business has some kind of physical connection to a state. Examples of a physical connection are: – Physical Business location– Employees– Storage of your goods in a warehouse or fulfilment center. |
| 2. Economic Nexus | If your business has “No Nexus” but makes sales out of state, Economic nexus must be considered. Each state has its own threshold of sales OR transactions (or both!) that a business can make without the requirement to collect tax. Once the threshold is breached, the business MUST collect and remit sales tax to that state. It’s important to have software that can monitor this for you, it is illegal to collect sales tax without the state sales and use tax licence, so you will need to register just before you reach the threshold to ensure you don’t pay any tax out of your own pocket. |
| 3. Affiliate or Click-through Nexus | Affiliate Nexus is a big grey area at the moment. Not all states have affiliate nexus, and those that do have it, vary massively in the definition of affiliate nexus and how you can reach it. For online businesses, if you are earning a commission for referring people to other online stores, you may need to pay sales tax. |
What to do when your business has Nexus?
| Register | Once you have determined you have Sales tax Nexus, you will need to register for Sales and Use tax with the state. Some states charge a fee for registering. |
| Collect Sales Tax | Your business will then need to ensure it is collecting sales tax on all transactions associated with the state you have now registered with. For online platforms, such as shopify, software is integrated so you can simply add your permit number and Shopify will charge the correct tax. If you are manually making invoices, you will need to add sales tax to the invoice. Make sure you are using the correct jurisdiction sales tax rates as some states have 100s of different tax jurisdictions. It’s highly recommended to have software in place to calculate this for you. |
| Remit Sales tax | Once you register for Sales and Use tax, you will be able to create an account with the state to file and remit your sales tax online. The state will allocate a filing frequency to your business. This can be monthly, quarterly, semi-annual or annual. Some states regularly review this and may change your filing frequency depending on the number of sales. |
| Keep Detailed Records | Once you register for Sales and Use tax, you will be able to create an account with the state to file and remit your sales tax online. The state will allocate a filing frequency to your business. This can be monthly, quarterly, semi-annual or annual. Some states regularly review this and may change your filing frequency depending on the number of sales. |
Consequences of Non-Compliance
If you fail to collect and remit tax in a state you have nexus, you can face severe consequences:
- Penalties and interest
If you are registered to collect and remit tax, but fail to do so on time, you can face penalties and interest. Penalties vary depending on the state, but can be up to 20% of the tax due.
- Back-pay owed tax
If you fail to register when you had nexus, you may need to pay back the sales tax you should have collected. For example, if you have nexus in California, and fail to collect tax on $100,000 over a 12 month period you would need to pay back $7250 in state tax + local taxes + penalties + interest. As you failed to collect the tax, this would be coming out of your profits.
- Reputational Damage
Failure to be sales tax compliant could result in legal action. This could cause a negative effect on your business’s reputation and brand. States can also issue liens which can affect your businesses’ credit rating.
How can RJM help?
RJM are experts in sales tax for online businesses and an excellent rated company on TrustPilot. You can book your Free Nexus Assessment and use RJM to complete your sales and use tax registrations, sales tax filing AND keeping of sales and use tax records.
RJM makes the process as hands free for you as possible, whilst keeping you in the loop every step of the way.
Reach out to us via email or contact us through our website if you would like to find out more.
