If the answer is “no,” take a moment to discover how simple it is to manage nexus obligations and become sales tax compliant. By fully understanding this obligation, your business will ultimately reduce its exposure to future negative sales tax audits. Nexus is defined as the obligation to collect and remit tax where business is conducted, however, there are a range of ways nexus is created and these rules vary from state to state. Nexus determination can be confusing if you are unprepared to deal with it.
To begin, almost every business has to calculate, collect, report and remit sales tax. More than likely, you are already paying taxes in your state and local jurisdictions as a result of business location. However, what happens when you sell something across state lines? Are you required to collect sales tax and how much? And to whom do you remit the tax? Nexus rules are established by individual states and every state defines them uniquely. Determining exactly how a rule applies to a business is critical.
To safely navigate these challenging tax rules individuals should consult an accountant, tax attorney or other qualified sales tax professional to conduct a nexus study for the particular business. Making the nexus determination on your own is difficult, confusing and can lead to problems further down the road. Once you have determined where Nexus exists for your business, you are required to calculate, collect, report and remit that state’s sales tax each and every time you make a transaction.
For this reason, sales taxes are remitted based on where your business is actually located because it is the physical structure of the business that actually creates nexus. However, there are several other scenarios where nexus can be applied and these should also be considered:
Scenario #1: The business has stores in multiple states. In this case, you will more than likely have sales tax obligations in each location.
Scenario #2: Nexus can be created by employing sales people who work in other states. For example, if your employees or contractors conduct any work at a customer’s out-of-state location, you may have nexus there as well.
Scenario #3: Regularly attending tradeshows or advertising in other jurisdictions beyond the physical location of a business can be considered Nexus in certain states. Additional factors that can create nexus obligations include:
- Property Ownership: Owning or leasing any real or personal property in another state
- Product Delivery: Having company personnel deliver products in another state
- Product Storage: Renting or owning out-of-state storage, warehousing or drop-shipping facilities
Paying sales tax may be inevitable, but the hassle is not. Selecting a web-based transactional tax management solution that performs behind the scenes of financial or ecommerce applications is critical to comprehensively automate the sales tax compliance function. The selected service should work seamlessly behind the scenes, should integrate with the existing business financial application and must automate the entire tax compliance functions of the business.
Editor’s Note: Avalara’s AvaTax is now available through the Intuit App Center; integrated with QuickBooks Online, AvaTax manages sales tax compliance and automates returns.