Demystifying Sales Tax Nexus

Sales tax nexus is a confusing topic for many business owners. That’s not surprising because different states have different rules for what establishes nexus in their jurisdictions.

Your clients will likely look to you for guidance in understanding this important topic. This Q&A article will cover information to help entrepreneurs determine their sales tax obligations in the jurisdictions where they sell taxable products and services. It can serve as a starting point for your clients on their quest to determining their nexus status:

Question 1: How would someone determine their sales tax obligations where they are selling taxable products and services?

Answer: Sales tax obligations are determined according to whether a business has substantial nexus in the state, region or country where it is conducting business. Usually, nexus is either physical or economic. Each state, region or country has its own rules and definitions.

Physical nexus

• Physical nexus is primarily derived from where business property is owned, where a business’s employees or sales agents work, and from where the company generates sales.
• Generally, physical nexus is established in a state if:
• The company has a physical presence — such as an office, warehouse, or retail store — there;
• The business has employees living or working in the state;
• The business stores inventory in the state — including merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in a warehouse owned or operated by Amazon;
• The company or its agents conduct in-person meetings with prospective or existing clients or customers in the state; and, · The business is structured as a limited liability company, C corporation, S corporation, or a limited partnership (LP)

Economic nexus

Economic nexus is created when a business exceeds a certain threshold of annual gross sales by dollar amount or by an annual number of transactions.

The best way for business owners to understand their sales tax obligations is to contact the state, region or country agency in the jurisdictions where their company sells taxable products and services. Or they can consider contacting a sales tax service provider (such as Avalara, Vertex or ONESOURCE by Thomson Reuters) for assistance.

Question 2: Is the income tax nexus threshold similar to the sales tax nexus threshold?

Answer: Sales tax nexus currently has two types of nexuses: physical nexus and economic nexus — as described in my response to Question 1.

Income tax (e.g., franchise tax, business and occupation taxes, etc.) has two types of nexuses:

• Physical nexus (see Question 1’s answer); and,
• Factor-based nexus.

Factor-based nexus is created when a business has property, payroll or sales that exceed a certain threshold. Therefore, income tax nexus and sales tax nexus are determined by different sets of rules and different thresholds. In some states, the thresholds may be similar.

Question 3: Does nexus change depending on entity type?

Answer: Nexus rules do not vary by business entity type. C corporations, S corporations and LLCs (limited liability companies) are subject to the same nexus criteria within a state.

Question 4: Are there websites that summarize sales tax nexus requirements by state?

Answer: Sales tax service providers can be excellent sources for getting a summary of sales tax physical and economic nexus requirements by state. Searching online for the information can help.

Some free online resources and tools, like those below, exist to help people identify if their business has reached the economic nexus threshold within states where they sell their products and services:

• Free Sales Tax Risk Assessment via Avalara;
• Remote Seller Nexus Chart via Sales Tax Institute; and,
• State-by-State Economic Thresholds Under State Sales Tax Laws via Wolters Kluwer

However, it can be challenging to know when details on the web have become out-of-date. Business owners may find more accurate information — and gain peace of mind — by contacting experts directly for the most current nexus criteria.

For your convenience, here is a list of several sales tax service providers your customers may want to consider as they determine their nexus status and sales tax responsibilities.

• Avalara
• CorpNet
• ONESOURCE by Thomson Reuters
• Sovos
• TaxCloud
• TaxJar
• Vertex

The bottom line

Your clients should make every effort to understand nexus criteria and fulfill their state sales tax requirements wherever they have physical or economic nexus. In addition to paying sales tax where required, they may also have to file for “foreign qualification” (Certificate of Authority) to conduct business in the states where they have nexus. Failure to pay sales tax or foreign-qualify a company can result in paying interest and suffering other penalties. Your clients can turn to you for guidance — to the extent that your professional credentials and licensing allow. And you can further help them by directing them to other tax and legal professionals for advice that’s outside your realm of expertise and authority.

(Source: AccountingToday – Best of the Week – Voices – February 5, 2022)