By Michael Rodriguez, CPA
For new and emerging businesses, the topic of sales tax “Nexus” can be tough to wrap your head around. In today’s rapidly changing environment and technology, more companies than ever may be subject to this key area regarding Nexus and sales tax.
Sales tax nexus is an important area to focus on for business owners that expand their busy operations across the states. Even without a physical presence in a state – businesses may be subject to economic nexus within a state and must comply with local rules and regulations regarding sales tax.
For emerging technological firms in today’s industries, it’s important to know the background for each state’s rules and thresholds for having economic or physical nexus in their state. Not staying compliant if Nexus is achieved in a state could result in heavy penalties and fines assessed for any growing business.
What is Sales Tax Nexus?
Sales Tax nexus occurs when a seller has a connection in a local jurisdiction or state, that results in the seller having to comply with local rules and regulations to collect and remit sales tax. In today’s business environment, there are various rules regarding determining physical and economic nexus.
With physical nexus, the rules are in relation to businesses that have a more physical connection in their state. For example, a business operating in a state where they have a business office location within the state or have employees working in a state – would be subject to physical nexus within the state. The business would have to register to collect or remit sales tax if they meet these requirements. Even having a temporary presence in a state could prompt physical nexus requirements.
Economic nexus results when an out-of-state seller operates within a state and meets certain thresholds in regard to their sales or number of transactions. The South Dakota v. Wayfair tax ruling in 2018 allows states to mandate that a business must collect and remit sales tax if they have over $100,000 in gross sales or 200 transactions since they now have economic nexus. Most states adopted this standard ruling – but not all of them. It’s important to check with each state specifically to see how they handle their own economic nexus thresholds. For emerging technological businesses, achieving economic nexus could be obtained rather quickly if they reach these certain thresholds in each state. Not staying sales tax compliant could result in significant penalties and fines with your business – so be sure to follow the rules and stay up to date.
Contact us at Sasserath for more detailed guidance or with any questions you may have at 631-368-3110 and allow us to help your business stay sales tax compliant today.