How much do you know about Sales Tax Nexus?
Updated: Aug 3
Each financial year brings new reforms to taxing policies, these taxes are popularly categorised into direct or indirect taxes. One such tax which falls into both these categories depending upon how it is imposed is sales tax. This article discusses sales tax and the sales tax nexus to provide a piece of brief information on these vast topics.
What is the sales tax?
The duty imposed on the sale and purchase of goods within the state is referred to as sales tax. It can be either a direct tax if imposed on the final supply to the consumer or an indirect tax if it is imposed as a value-added tax during the production process. Sales tax laws are different for different states. Usually, this tax is levied on the buyers at the point of purchase.
Americans pay between 2.9% and 7.25% of the price of goods they buy in the majority of states unless you live in one of the five states that don’t charge sales tax.
Tools like sales tax calculator can be of great help to calculate the correct amount of sales tax to charge, considering over 10,000 jurisdictions and many of them having a unique set of rules which can lead to significant exposure if one fails to calculate the sales tax accurately. Hence, it’s up to you to ensure you are charging the correct amount.
What is Sales Tax Nexus?
Sales tax nexus is a result of physical presence such as brick-and-mortar location creates an obligation to collect and remit sales tax or connection in a state that’s significant for you to be required to comply with their sales tax act. Having an employee in a state, having an affiliate, having a warehouse or storing inventories or Economic nexus can a constitute a nexus.
Online sellers having sales tax nexus in a state, must collect sales tax from buyers in that state.
For an example where New York has passed “Amazon Law” requiring internet retailers such as Amazon.com Inc. to pay sales taxes despite their absence of physical presence within the state. As discussed, the sales tax is charged based on the location where the invoice is generated. So location is important to factor when discussing Economic Nexus.
Tax act after Wayfair case.
Typically, every person or entity that is engaged in the business that’s is involved in the retail sale of goods, or assets are liable to impose taxes on the sold products as per states law. On June 21, 2018, the Supreme Court of the United States ruled in favour of the state in South Dakota v. Wayfair, Inc. This verdict permits the state to begin taxing remote sales through its economic nexus laws. Since the ruling, more than 40 states enacted economic nexus laws of their own as of December 2019. Before the Wayfair nexus ruling, states could only enforce a tax collection obligation on businesses that had a physical presence in the state, such as a brick-and-mortar location or remote employees. While the physical presence criterion still exists, nexus laws were extended to include sales tax obligation based on a certain level of economic activity inside the state, including sales receipts, trade volume, or a union of both.
State sales tax registration and filing
Sales tax filing can be done online. One can go to the website of that state’s taxing authority and register for a sales tax permit. The permit will allow you to collect, report and pay sales tax on taxable items. Most states allow online registration, so have all information about your business and its owners ready before you begin the process.
Also do not forget to check the Coronavirus Tax Relief made available by IRS (Internal Revenue Service) for businesses and Tax-exempt entities before filing your taxes.