Before the Wayfair Sales Tax Case in June 2018, retailers only had to have a physical presence in a state before they needed to collect sales tax, as ruled by the Quill v North Dakota Supreme Court case. However, the Wayfair act came in and completely overturned that.
As a result of this new ruling, retailers with any sort of presence, whether physical, digital or financial, in a state need to adhere to sales tax compliance. Physical presence includes employees, inventory or any sort of location. If the seller has sales in a state where it has no physical presence (so has online sales) the seller must comply with each state’s ‘economic nexus‘.
What is nexus?
Nexus is, by definition, a connection. When used in regards to sales tax, it refers to connecting the seller to sales tax liability. However, the definition is not a one size fits all, and there are a whole host of rules and regulations, depending on what state you are talking about. There are 50 states with more than 12,000 sales tax jurisdictions. Each of these states creates and controls their own economic nexus and has the right to change it with minimal notice – it is little wonder that business owners get confused!
There are five states that do not have a general sales tax. These are: Alaska, Montana, Delaware, Oregan, and New Hampshire. However, to make it extra confusing, some localities in Alaska and Montana have sales tax!
Once a seller has established sales tax nexus in a state or jurisdiction, the burden is on them to register as a retailer in each nexus state or jurisdiction so that they can begin collecting sales tax from buyers and, of course, pay the collected taxes to the respective states or jurisdictions.
To understand your sales tax compliance, here are the different types of nexus that sellers need to understand:
Click-through nexus: This is when someone working remotely, such as an agency, promotes your products and gets a buyer to click on a link. If the click-through leads to a sale on your marketplace or website and, in turn, you receive a commission for the sale, this is liable for the tax.
Home state nexus: The state where you have your main physical presence qualifies you for sales tax nexus and you must collect sales tax.
Employee nexus: If you have remote employees or sellers working for you in other states, you have established sales tax nexus in those states.
Economic nexus: This is based on dollar and transaction volume. Check with each state you get sales from to see if you’ve reached that state’s economic nexus, which is usually $100,00 in sales or 200 transactions.
Marketplace nexus: When selling on a third-party marketplace, such as Amazon, the marketplace typically collects sales tax for you. Check the state laws to learn where the burden lies for your marketplaces.
While sales tax nexus feels like a lot to get your head around, it is important that you do to avoid being hit with any penalties or paying a lot more than you would, so make sure that you do your research and get expert advice if you are unsure about where you have economic nexus.