Understanding Nexus for Sales Tax: What Businesses Need to Know

Sales tax can be a complex topic for many businesses, especially when it comes to understanding nexus. Nexus determines whether a business must collect and remit sales tax in a particular state. Getting this wrong can lead to penalties, audits, and unexpected tax bills. This post breaks down what nexus means, how it applies to sales tax, and what businesses should do to stay compliant.

What Is Nexus in Sales Tax?

Nexus refers to a business's significant connection to a state that requires it to collect and pay sales tax in that state. This connection can be physical, like having an office or employees, or economic, based on sales volume or transaction numbers. With the rise of online sales, many states now apply economic nexus rules, allowing them to require out-of-state sellers to collect sales tax regardless of physical presence.

Examples of Nexus Triggers

Here are some common ways a business can establish nexus for sales tax:

• Having a physical location, such as a store, office, or warehouse, in the state

• Employing salespeople or contractors who work in the state

• Storing inventory in a third-party warehouse or fulfillment center within the state

• Making sales that exceed a certain dollar amount or number of transactions in the state (economic nexus)

  
  

For example, if an online retailer sells $150,000 worth of goods or completes 200 transactions in a state during a year, that state may require the retailer to collect sales tax, even if the retailer has no physical presence there.

Why Nexus Matters for Your Business

Understanding nexus is crucial because it determines your sales tax obligations. If your business has nexus in a state, you must:

• Register for a sales tax permit in that state

• Collect the correct sales tax from customers

• File regular sales tax returns and remit the collected tax

  
  

Failing to comply can result in back taxes, interest, and penalties. Many states have become more aggressive in enforcing nexus rules, especially after the 2018 Supreme Court decision in South Dakota v. Wayfair, which allowed states to enforce economic nexus.

How to Manage Nexus Compliance

Managing nexus can be challenging, especially for businesses selling in multiple states. Here are some practical steps:

• Track where you have physical presence, including warehouses and employees

• Monitor your sales volume and transaction counts in each state

• Use sales tax software or services that help identify nexus and automate tax collection

• Register for sales tax permits promptly when nexus is established

• Keep detailed records of sales and tax filings for each state

  
  

For example, a small business using a third-party fulfillment center like Amazon FBA should check if the warehouse location creates nexus. If yes, the business must register and collect sales tax for sales shipped from that warehouse.

Final Thoughts on Nexus and Sales Tax

Nexus rules now extend beyond physical presence, complicating sales tax compliance for businesses. Understanding your nexus helps you avoid costly mistakes. Review your connections to states where you sell and use expert tools for accurate tax collection. Proper nexus compliance protects your business and fosters trust with customers and tax authorities. If you're unsure about your status, consult a tax professional for tailored guidance. For more information, contact The Center for Financial, Legal, and Tax Planning, Inc. at (618) 997-3436.