Last Updated on March 17, 2022 by DMEditor
eCommerce is today’s fastest-growing retail sector, with online sales forecast to reach $7.4 trillion in 2025. With that growth comes new tax challenges for online retailers. Tax law is complicated, and the definition of nexus can be confusing for business owners. In simple terms, nexus is the link between a company and a taxing authority that establishes the jurisdiction to tax that business.
In most cases, physical presence in a state is the primary factor in determining nexus. It could be a store, warehouse, office, or other physical location.
The case for online retailers is somewhat different. It couldn’t be that the business has a physical presence in all the 12,000 jurisdictions, including the 50 states in the U.S. So, how does the taxman determine where an online retailer should be taxed? This article elaborates on what nexus for ecommerce stores means and how to determine if your business has a sales tax obligation in different states.
Bottom Line Up Front
eCommerce businesses don’t necessarily need a physical presence in a state to have nexus. The law states that by having customers in a particular state, an online retailer has nexus and is subject to sales tax laws. As such, out-of-state businesses have to remit sales taxes once they meet a certain threshold set by the state’s taxing authority.
Types of Sales Tax Nexus
For ecommerce businesses looking to sell in multiple states, it’s essential to understand the different types of nexuses. Four different types exist, and any company that meets the criteria must comply with the state’s sales tax laws.
The four types of nexuses are:
A business is liable for sales tax in a state if they have economic nexus. Economic nexus is when a company records a certain amount of sales or transactions in a state. The threshold for economic nexus can vary by state but is typically 200 transactions or $100,000 in sales.
Click-through nexus is when a business has a relationship with an in-state entity, such as a publisher or affiliate. They have click-through nexus if the company receives a commission for referring customers to an in-state retailer. As such, they must comply with the state’s sales tax laws.
Marketplace nexus is when a business sells goods or services through an online marketplace. Essentially providing ecommerce infrastructure for a third party, the business is liable for sales tax in states where they have nexus.
Affiliate nexus is similar to click-through nexus. It’s when a business has a relationship with an in-state affiliate. The affiliate can be an individual, company, or organization. As with click-through nexus, the business must comply with the state’s sales tax laws.
Defining Sales Tax Nexus for eCommerce Stores
The inception of digital sales brought about a rather complex question for state tax authorities. How could they tax retailers who had no physical presence in their states? The Supreme Court’s decision in the South Dakota v. Wayfair, Inc was a watershed moment for ecommerce companies.
This ruling overturned Quill Corp. v. North Dakota, which mandated that a business must be physically present in a state to be liable for sales tax.
The Court ruled that the physical presence rule held no ground in the Wayfair case since it did not reflect the modern economy. The Court said that a business could have nexus simply by having sales in that state, regardless of whether it had a physical presence.
The Court left it to the individual states to determine what other factors could create nexus. Therefore, each state had to develop additional laws to actuate the ruling.
The Implication of the Wayfair Ruling on eCommerce Sales Tax
The Wayfair ruling has far-reaching implications for online retailers. It means that businesses will have to keep adjusting to new state laws and regulations as they change.
It also means that businesses need to be more vigilant in tracking their sales and filing sales tax returns in all states with nexus.
Previously, online retailers could get away with not remitting taxes in certain states since they had no physical presence there. But, with the Wayfair ruling, that’s no longer an option.
What Constitutes Nexus for an eCommerce Store?
The definition of nexus can vary from state to state. However, states consider other general factors when determining nexus.
From the Wayfair understanding, ecommerce stores establish nexus once they have an economic presence in a state, mainly through customers. That is, they’ve generated sales or transactions meeting the set threshold in dollars or volume.
Other economic-based activations that could create nexus for an online retailer include:
- Using affiliate linking programs to sell products
- Using drop-shipping arrangements
- Fulfillment activities such as fulfillment by Amazon
- Attending tradeshows and other marketing events in a state
- Having an office, employees, or other physical presence in a state
- Receiving payments for services performed
- Traveling representatives in a state to solicit sales, i.e. (under the New York law)
- Hiring independent contractors in a state
This list is not exhaustive, and each state has specific factors that it considers when determining nexus. Online retailers need to consult with a tax professional to determine if they have a sales tax obligation in a particular state.
How to Determine If You Have Nexus in a State
About 45 states impose a sales tax, and each has its own set of rules for collecting and remitting the tax. Those that don’t have a sales tax include Montana, Delaware, Oregon, New Hampshire, and Alaska.
However, Alaska is a nuanced state. Although it doesn’t have a general sales tax, several jurisdictions within the state do have a local sales tax. For this reason, Alaska imposed a uniform code to make it easier for businesses to comply with the tax from 2020.
Take these steps to determine if you have nexus in a state.
1. Researching the State’s Nexus Laws
Each state has its own set of nexus laws. You can research the specific rules for each state on their Department of Revenue website. The website will list the factors that create nexus and determine if your business has a tax obligation.
For instance, the New York State Department of taxation and finance clearly outlines the registration requirements for doing business without any physical presence in the state.
Several organizations have come up with charts that simplify understanding the states’ nexus laws. One of the most comprehensive is the Streamlined Sales tax Governing Board’s Nexus Chart. This chart outlines the remote seller threshold, compliance date, and revenue department website.
You can also find more information from the Tax Foundation and the National Conference of State Legislators.
2. Reviewing Your Business Footprint
If your business is physically present in a state with facilities such as an office, warehouse, or employee, then you will have sales tax nexus in that state. You must register with the state’s revenue department and begin collecting and remitting sales tax.
Track your sales and business activities to see if you are conducting any business in a state where you have nexus. In addition, review your business contracts and marketing activities.
If you are unsure whether you have nexus in a state, contact the state’s revenue department for clarification.
3. Check for Thresholds
Some states have a revenue threshold before you are required to register for sales tax and begin collecting and remitting sales tax. The threshold is the minimum amount of taxable sales that your business must generate to have nexus in the state.
For instance, the annual ecommerce sales tax threshold for the state of New York is $500,000 for physical property sales. The business must also deliver more than 100 sales to the state.
Checking for threshold minimums ensures that you only register in states where your business meets the requirements.
4. Consider Local Sales Taxes
In addition to state sales taxes, some local jurisdictions also have a sales tax. The tax rates and which jurisdictions have the tax can vary.
Ecommerce businesses should research the local sales taxes in the states where they have nexus. You will need to collect and remit these taxes in addition to the state sales tax.
5. What is the States Affiliate Policy?
Some states have an affiliate policy taxing any sales generated through affiliates. It could be a company or an individual physically located in the state or a company outside the state.
Facilitator platforms such as Amazon or Etsy may take care of sales tax on your behalf. However, it would be best if you still researched the state’s affiliate policy to ensure that you comply. Ask the facilitators if they are registered and audit-compliant in the states where you have nexus.
How to Comply with eCommerce Sales Tax Laws
Once you determine that you have nexus in a state, you need to take steps to comply with the sales tax laws. The following are some general tips:
1. Register for Sales Tax
You need to register with the state’s revenue department and begin collecting and remitting sales tax. You can usually do this online. The registration process will require you to provide your business information, such as your name, address, and contact information.
Some states will require that you obtain a sales tax permit. This permit will authorize you to collect and remit sales tax. You can use the Streamlined Sales Tax Registration System to register in all Streamlined states or any additional states when needed.
Some states, such as Alaska, provide lookup tools to determine if a business must register. The Alaska sales tax lookup tool ensures all local taxing authorities are considered when deciding.
2. Collect and Remit Ecommerce Sales Tax
For each sale subject to sales tax, you must remit it to the state. States have different ways of collecting taxes. While some collect the taxes monthly, others may require you to remit the taxes quarterly or annually.
It’s essential to keep track of the sales tax you collect and remit. You can use a sales tax calculator to help with this. A sales tax calculator will estimate the amount of sales tax you should have collected and help ensure that you are paying the correct amount.
Most ecommerce CMS platforms have a built-in sales tax module. If you use a third-party shopping cart, check if they offer a sales tax module. If not, consider using a service that does, such as TaxJar or Avalara.
3. Keep Your Records Straight
States require businesses to keep track of all the taxable sales they make. Businesses can do this by documenting sales, tracking inventory at each location, and keeping invoices.
States also require businesses to keep track of sales tax collected. This information is crucial during audits. You will need to provide sales documentation on what was sold and the corresponding sales tax collected.
4. Stay Up to Date on Changes
Sales tax laws are constantly changing. It’s important to stay updated on the changes to maintain your compliance obligations. You can do this by signing up for a sales tax newsletter, checking the Streamlined Sales Tax website, or contacting your state revenue department.
Tax changes can be anything from new laws to changes in tax rates.
5. Find a Sales Tax Consultant
If you feel overwhelmed by the sales tax laws, it might be helpful to consult with a sales tax consultant. They can help you determine your nexus, collect and remit the correct taxes, and keep up with any changes.
eCommerce Sales Tax Solutions
Software developers have designed tools to help business owners comply with sales tax laws. Here are a few of the most popular:
TaxJar is a cloud-based solution that helps businesses of all sizes track their sales and collect and remit sales tax. It offers both automatic and manual sales tax collection methods. It stands out as a top solution for auto-filling sales tax returns and detailed sales tax reporting.
Avalara is a cloud-based solution that helps businesses of all sizes with sales and use tax compliance. It offers automatic sales and use tax calculation, filing, and remittance. It also includes exemption management, audit defense, and product classification services.
Small and medium-sized businesses will find Vertex is a good fit. It offers both cloud-based and on-premise solutions. Key features include sales tax calculation, exemption certificate management, and returns filing.
TaxCloud is a cloud-based solution that helps businesses of all sizes with sales tax compliance. It’s a top management service for online sellers selling on facilitator platforms like eBay, Amazon, and Etsy. It can help sellers calculate sales tax, file returns, and manage exemptions.
5. Taxify by Sovos
Avoiding tax gaps is crucial for businesses of any size. Taxify by Sovos is a cloud-based solution that helps businesses stay compliant with sales and use tax laws. It offers automatic sales and use tax calculation, filing, and remittance. It also includes exemption certificate management, product classification services, and audit defense.
Answer: Nexus is a business’s relationship with a region governed by a taxing authority or body such as a state. Nexus is created when a business has a physical presence, such as a store, office, or warehouse, in a state. A company also has nexus in a state if it sells goods or services over the Internet to customers in that state.
Online businesses have nexus in states where they have customers and in those that they have a physical presence, such as an office or warehouse. Different stores have different nexus requirements, so it’s essential to research the specific state laws. Businesses must pay attention to the laws because non-compliance can lead to fines and penalties.
The best way to keep track of economic nexus is to determine where you have nexus, evaluate the thresholds of each state, and keep track of the sales you make in each state. You can use a sales tax solution to help with this process. Stay up to date on any changes to the nexus laws in each state, and consult with a sales tax consultant if you feel overwhelmed.
What is Nexus for eCommerce Stores: Conclusion
The basic nexus principle is that a business has a relationship with a state and is, therefore, responsible for sales tax in that state. Ecommerce businesses have nexus in all states where they have customers or any other economic presence, such as affiliates or storage facilities.
Nexus laws are constantly changing, so businesses need to stay updated on any changes and consult with a sales tax consultant to ensure compliance. Using a sales tax solution can help with the process of tracking and complying with nexus laws.
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