INSIGHTS The Crucial Role of Economic Nexus in Sales Tax Compliance for Online Sellers

By: Amanda Bristol, CPA

Expanding your online business across multiple channels is a smart move in today's digital era, but it also brings new challenges, especially in the realm of sales tax compliance. In this article, we will delve deeper into the concept of sales tax nexus, with a particular focus on the metric that plays a pivotal role. Understanding and managing your sales tax nexus is paramount for small and mid-sized business owners looking to thrive in e-commerce.

What is Sales Tax Nexus? Since the pivotal Supreme Court case South Dakota v. Wayfair in 2018, out-of-state retailers selling products online are required to collect sales tax in states where they have sales tax nexus. Sales tax nexus essentially represents a substantial connection between your business and a specific state, obligating you to collect and remit sales tax from buyers in that state. Crucially, the criteria for establishing nexus often revolve around what's known as the "economic nexus threshold." States view businesses as benefiting from their infrastructure and expect them to contribute by collecting sales tax from buyers. As sales tax constitutes a significant portion of revenue for many states, they actively seek to include as many online merchants as possible to bolster their tax revenue.

Understanding the Nexus Metric The metric that plays a pivotal role in determining whether your business has a sales tax obligation in a particular state is quite significant. This metric considers the level of economic activity your business conducts in the state, irrespective of physical presence. Common elements that contribute to this metric include:

1. Sales Thresholds: Meeting or exceeding a specified sales revenue in a state over a defined period can trigger this metric. Each state sets its own sales threshold.
2. Transaction Thresholds: Some states consider the number of individual sales transactions as a factor. If you surpass the state's transaction threshold, this metric is established.
3. Remote Sales: Selling products online to customers in a state can create this metric based on the sales volume.

Navigating Sales Tax Nexus for Compliance Understanding the metric that determines sales tax nexus is vital for online sellers. To ensure compliance with sales tax regulations, consider the following steps:

1. Monitor Sales Activity: Keep a close eye on your sales and transactions in each state. Ensure you are aware of the specific thresholds set by each state.
2. Register and Collect: If you meet the criteria in a state, promptly register for a sales tax permit and begin collecting sales tax from buyers in that state.
3. Accurate Tax Rates: Confirm that you collect the correct sales tax rate based on the buyer's location. Some states use origin-based sourcing, while others use destination-based sourcing.
4. Filing Requirements: Be aware of the filing frequency assigned by the state when you register for a permit. File your sales tax returns and pay the collected taxes to the respective states on time.

Transitioning Away from Nexus If your business decisions lead to the cessation of nexus in a particular state, follow these steps:

1. Notify the State: Contact the state's taxing authority to inform them of the change. The process may vary by state.
2. Trailing Nexus: Be aware that some states may still consider you to have nexus even after you've ceased nexus-creating activities. Clarify this with the state's taxing authority.

Understanding and managing sales tax nexus is a critical aspect of sales tax compliance for online sellers. For expert guidance in navigating this intricate facet of e-commerce, consider connecting with an R+R tax advisor. Complying with sales tax regulations will ensure your business thrives and open doors for expansion across various online channels.

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