For tax purposes, nexus is defined as: the minimum connection or link necessary, which allows a state to tax you or force you to collect taxes on its behalf. This minimum link can vary from state to state as well as from tax to tax. Some nexus-creating activities are obvious, others less so.
How do we determine if we have nexus?
The best way to determine if you have nexus is by making a list of all your activities in each state and then reviewing the states’ guidance for whether or not you have nexus on a tax by tax basis.
What do I do once I've determined I have nexus?
Once you have determined your nexus footprint, you would think the next step is to get registered and start collecting sales tax. But wait! Do not get registered without first determining if what you sell is taxable, and if so, if you have any past exposure. If you have never been registered, states will probably want you to pay back taxes, penalties, and interest for the past seven to 10 years, or longer. If you do have past exposure, you will want to review some options on how to mitigate your liabilities.
At what point do I register and start collecting tax?
Just because you have nexus in a state, doesn’t mean you should just panic. You should be concerned, but do some analysis of your situation to determine if and when you should start collecting the tax from your customer. Based mostly on the volume of sales you make in a given state, it may not be worth it to collect the minimal taxes in that state. This is entirely possible in some states where you sell. On the other hand, when you consider all the costs of not collecting the tax, you may find that it’s actually cheaper to start now. Here are some items to consider: Materiality — Is the level of sales into that state enough to warrant a concern about sales tax? We have a good article that discusses materiality in more detail. Past Exposure — States can go back to when you first had nexus in that state and assess you the tax you should have collected from your customers. If you’ve been in a state for many years, this has to factor into your analysis. Penalties and Interest — Typically states will assess at least a 10% penalty on late payments. Interest varies all over the board, but it accrues from day one, so it’s not unusual for interest to become very significant. Cost of Compliance — In your analysis of when you should start collecting tax, factor in how much it will cost each month to calculate the tax due on your customer invoices and then how much to fill out the monthly/quarterly/annual forms and remit the tax. The cost of this “compliance” has come down tremendously over the years, but it’s still not free. Audit Exposure — If you sell to large businesses, chances are your invoices will be seen by some auditor somewhere. If you make small sales to only individuals, the chance you will be audited for sales tax go down significantly. Remember the Biggest Tragedy in Sales Tax – Be conservative about sales tax collection. Don’t become a victim.
Great question! It’s not so impossible to get registered to collect sales tax in a state. It’s just tedious and time consuming. You can do it yourself if you have the time and patience. You go to each state’s Department of Revenue or its equivalent to find out how to get registered. The easiest way to find correct information is to Google the state DOR with the words sales tax registration and you’ll get what you’re looking for. Some states have an online registration process and some do not. In some states you may want to choose a paper registration over the online registration, because the online registration may require additional potentially unnecessary registrations. An example of an additional registration that may not be needed is a Secretary of State registration. OR, you can hire someone like PJCo to do the filings for you. Our process involves your telling us where you want to be registered, and your providing us with some required information, and our handling the rest. Our experience helps streamline the process and provides for a less stressful more efficient experience. We can usually get it done in much less total time overall, so you can begin collecting taxes quicker.
How do I report sales tax I collect to each state?
So many online sellers seem to get stuck here, or they’re making some invalid assumptions. It seems like many online sellers seem to think that somehow someone else is paying the tax over to the state governments. Amazon FBA is a really great service. Unfortunately, they end up creating nexus for online sellers who have inventory in all of the states, but once you configure the seller’s dashboard and indicate what states you want to collect tax in, then it’s pretty automatic. Amazon starts adding tax to all shipments to those states. Easy. But don’t assume that Amazon sends those taxes to the states. They don’t. They actually send it to you and it’s up to you to remit it. You remit it by filling out the appropriate forms each month or each quarter or even annually, and then sending in the indicated tax on that form. Easy, in theory. As a practical matter it’s quite the bother. Still, if you have the time and inclination, it’s something you can do on your own. If not, we suggest you talk to us about how we can take over that process for you and shockingly low prices.
How does drop-shipping work for sales tax purposes?
A drop shipment is a transaction where a seller accepts an order from a customer, then places the order with a third-party supplier – typically a manufacturer or wholesale distributor – and directs the manufacturer to ship the goods directly to the customer. The manufacturer/supplier bills the retailer for the wholesale price and the retailer then bills the customer the retail price. The state’s rules that must be followed and the tax that applies is the state where the goods are delivered to the customer – so the ship to state.