According to the Oxford Dictionary, a nexus is “a connection or series of connections linking two or more things.”
Okay… So why are we bringing this word into the world of business?
Because it matters.
In fact, it can be a costly error if you aren’t aware of it, one you could’ve easily avoided just by understanding how it factors into your business.
I don’t say that to scare you, but rather because I want you to be 100% informed on what’s affecting your bottom line.
So, without further ado…
Meet Sales Tax Nexus!
Sales tax nexus happens when your business is tied to a state through either a physical presence or economic connection.
Here are some examples:
You’ve got an office, store, or location in a state (yes, your home office counts!)
You’ve got an employee, salesperson, or contractor in a state
You own a warehouse, storage facility, or 3rd party fulfillment center
In some states, you may even have a nexus for temporary activities, such as participating in a trade show!
Now let’s dig a little deeper.
The rules vary state by state, and some require specific dollar amount thresholds to create a nexus.
But the bottom line is… Many business owners are operating with nexus and totally in the dark about it.
Are you one of them?
Hmm. I Think I’ve Got Nexus. Now What?
If you suspect nexus applies to your business, you’ll have to collect sales tax from buyers in the associated state, and then remit those to the taxman.
And remember, city and district taxes could apply too!
Now, not to make things even more confusing, but there are two different rules of thumb you need to consider.
Origin-Bases Sales Tax v. Destination-Based Sales Tax
Stick with me, because this is important.
In an origin-based sales tax state, you’ll charge the state and local sales tax associated with your business’ location to everyone you’re shipping taxable items to in that same state.
In other words, if your warehouse is in New York, and you’re shipping a product to a customer in Brooklyn, you’ll follow New York’s sales tax rates.
Not too difficult, huh?
However, things get a little more complicated when we move into destination-based states.
In this scenario, you’ll have to calculate your sales tax rate based on the exact location of your buyer.
And that means you could end up needing to charge multiple different sales tax rates, even if your buyers are located in the same state as each other.
Now, I bet I can guess what you’re thinking…
Umm… How Often Am I Gonna Need to Deal With This?!
I know, I know.
It’s like seasonal affective disorder.
There’s nothing fun about the idea of incorporating additional tax rules into your business.
And I wish I could give you an easy answer like, “don’t sweat it!” or “once in a blue moon!”
But the reality is, the rules vary state by state. And they’re based on multiple factors, including…
Type of business
All of which determine what you’re required to report and how often.
It may be tempting to avoid the nexus dilemma like the plague.
However, ignoring it will leave you with much bigger fish to fry on the backend.
The good news is this:
You DON’T have to do this alone. In fact, no one expects you to!
Still confused? It’s totally okay. Call us today and we’ll help you figure it out.