Sales Tax Nexus: What Every Online Seller Needs to Know

It’s no secret that sales tax is confusing, but it gets even more challenging when nexus is involved. Nexus means a connection between or series of connections between two things. States frequently use it when a retailer has some sort of connection with a state, either physical or economic activity, that requires them to collect sales tax from buyers.

In this guest post from Zamp, we’ll explore what sales tax nexus is, the different types of nexus that may impact a business, and tips on navigating state sales tax nexus to ensure compliance.

What Is Sales Tax Nexus?

As mentioned above, nexus occurs when there is a connection between two things. States generally look at sales tax nexus from a physical and economic standpoint. This applies if you have a physical store or business headquarters in a state or if you ship orders to a specific state and trigger an economic nexus threshold.

Companies with a physical or economic nexus in a state must register there and collect sales tax from customers. Only recent survey by Zamp found that 68% of e-commerce businesses are not fully aware of tax laws that could impact their business.

What Business Factors Create Sales Tax Nexus?

Laws regarding sales tax vary from state to state. This is a general overview of the factors that tend to create sales tax nexus for retailers:

Location: This can include a store, office, home office, factory, warehouse, or other physical presence in a state.
Employees: This could include employees, sales representatives, contractors, and other people working for your company in a state.
Inventory: This can include anything from simply storing your inventory to owning a warehouse and housing inventory inside.
Click-through nexus: A third-party affiliate making sales on your behalf can trigger sales tax nexus in certain states once your affiliate exceeds a certain sales threshold.
Doing business temporarily: Selling items temporarily in a state, such as at a trade show, concert, or craft fair, can trigger sales tax nexus.
Exceeding economic nexus thresholds: Almost every state requires sellers to collect sales tax from customers in a state once they exceed a certain in-state sales threshold. This is usually $100,000 in sales and/or 200 sales transactions.

Note that marketplace facilitators, like Amazon and Etsy, collect and remit sales taxes for you to the states. However, as an online seller or business owner, you must verify that the amount they’re remitting is correct so you can stay compliant.

What to Do if You Have Sales Tax Nexus

If you have sales tax nexus in a state, you must comply with that state’s sales and use tax requirements. This generally means you’ll need to:

Register for a state sales tax permit. Typically, you can register for a sales tax permit through a state’s Department of Revenue (DoR) or equivalent agency.
Collect sales tax from buyers in that state. Once you have registered in a state, you’re obligated to collect sales tax from all buyers. One exception to this is if you use a marketplace like Amazon or Walmart, which is required in most US states to collect sales tax on your behalf.
File and remit sales tax to the states. When you register for sales tax in a state, you’ll be assigned a sales tax filing frequency and due dates. These generally fall either monthly, quarterly, or annually, depending on your sales volume. Be sure to file a sales tax return and remit the sales tax you’ve collected to the state.

7 Tips for Navigating State Sales Tax Nexus

There’s a lot at stake if you aren’t aware of your sales tax obligations. You not only face higher fines and penalties from the states where you have not paid sales taxes but are also at risk for future audits.

Here are some tips for navigating state sales tax nexus to stay compliant.

#1 Conduct a Nexus Analysis

To understand your sales tax obligations as a business or online seller, you should first conduct a thorough nexus analysis. This will include reviewing all your transaction data by state, along with your business relationships and physical locations/presence, to determine where you have sales tax obligations.

You should regularly conduct nexus analyses to determine where to register and pay state sales tax. Depending on your business's needs, these can be done weekly, bi-weekly, or monthly.

#2 Know Sales Tax Rates

Whether you’re a business owner, operator, or finance professional, you should keep up-to-date with the sales tax rates in the states where you operate. This will allow you to know how much you should charge your customers and remit to the states. Note that rates can vary by state and sometimes by city or county.

You can track sales tax rates and changes by subscribing to state and local government news and tax alerts.

#3 Register for Sales Tax Permits

Registering for sales tax permits is usually a legal requirement when reaching nexus in a state. You’ll need to follow the steps online, but will typically need:

Your federal tax ID, called an EIN, issued by the Internal Revenue Service (IRS)
Knowledge of your business structure
Business owner information
Address

#4 Use Sales Tax Automation Tools

Managing sales tax and tracking nexus thresholds doesn’t have to be done manually by you and your team. Sales tax automation tools can help calculate rates, conduct nexus tracking, help you register for permits, and even file your sales tax returns. These tools help streamline the process and reduce the risk of errors.

Further, sales tax compliance software can help you stay current on the latest sales tax rates and rules, generate accurate rates for tax authorities, and alleviate other challenges that may occur.

#5 Keep Detailed Records

Have you ever tried to find information in your office but couldn’t because it wasn’t organized? As a business owner, you must keep detailed and accurate records that are easily accessible. This is so you can answer any questions that may arise from sales tax and also so you can have precise reporting.

Having readily available information will also help in case tax authorities ever audit you.

#6 Train Your Team

It takes a team to ensure your business stays on the right side of state sales tax laws. Ensure your team understands sales tax laws and the implications of not being compliant.

If you have sales tax software, be sure to train those involved in the sales and accounting part of your business. They can help keep your business compliant and track if you hit nexus thresholds in any new states.

#7 Consult with Tax Professionals

Figuring out sales tax on your own can be a big lift. If you’re trying to figure out where to start, consider speaking with a tax professional. A sales tax expert can guide you in the right direction regarding how to register for a sales tax permit and where you need to file sales tax returns so you can stay compliant.

Conclusion

Companies that want to stay compliant and avoid hefty penalties must know the ins and outs of sales tax nexus. The good news is that you don’t have to handle sales tax alone. There are fully managed sales tax solutions, like Zamp, that can help you stay compliant from start to finish.

Zamp offers a full sales tax compliance service that starts with a dedicated and experienced customer service team that handles the setup process and configures your account. After this, the Zamp team handles all things sales tax, from nexus tracking to registration, mapping, reporting, and filing.

Contact Zamp for a free nexus assessment and answers to all your sales tax questions.