In the USA, where companies generally cross state lines to offer services or products, taxes can very easily get complex. An important term here is "sales tax nexus." Whether you are a small online seller or the CFO of a multinational corporation with offices across several states, sales tax nexus matters in case you wish to stay away from costly penalties.

In this article, we will highlight how essential the sales tax nexus is to avoid being penalized by the authorities in America. We will also see how expert sales tax consultancy services in the USA can help you with this important metric.

What Is the Sales Tax Nexus?

Essentially, the sales tax nexus is the link between your small business and a state which leads you to collect and pay sales tax. If your business has a "nexus" or presence in a state, you collect sales tax from clients in that state and send it to the government.

The tough part is the fact that what constitutes a nexus could be state specific. Nexus rules are inconsistent nationwide, making everything confusing for business owners like you.

The Evolution of Sales Tax Nexus

States usually only needed sales tax from businesses in case they were physically present in the state. This meant you needed a store, warehouse or office there, or employees in that state.

However all changed in 2018 after the Supreme Court decision in South Dakota v. Wayfair. The court's decision produced what's referred to as "economic nexus," meaning that even in case you do not physically shop in a state, you might still owe sales tax on your sales volume or the number of purchases you are making in that state.

For instance, many states impose sales tax rules in case your business offers over USD 100,000 in sales or completes 200 transactions with people within their state without having an actual location or workers there.

How Do You Know If You Have a Sales Tax Nexus?

It might be overwhelming to determine if your business has a sales tax nexus in a state, but it pays to realize what could cause it. Listed here are several ways you could establish a nexus:

1. Physical presence nexus 

If you have an office, shop, warehouse or workers in a state you probably have a physical presence nexus. This is the easiest method to determine your sales tax responsibility. As an example, if you launch a store in another state or maybe you send out your sales reps to a trade show, that may activate a nexus.

2. Economic nexus 

Even if you have no actual physical presence, several states require you collect sales tax on orders over certain thresholds. For instance, in case you sell products online, economic nexus laws may come into effect once your sales achieve a particular amount or threshold of transactions in a state.

3. Affiliate nexus 

If your business has relationships with affiliates or partners in another state, this could create a nexus. For instance, a marketing partner who is based in a different country and which brings product sales in your company could be regarded as a presence in that state.

4. Remote employees nexus 

With remote work on the rise, you know having employees in different states can create a nexus, even if your main office is everywhere else. This is especially important in case your remote employees sell or maintain a market in your state.

Why Sales Tax Nexus Matters

As a business owner, knowing the sales tax nexus matters since it impacts your profits. Not paying state tax laws may lead to back taxes, penalties and interest.

In case your business sets up nexus in a state but doesn't collect and remit the correct sales tax, you can owe back taxes on every sale made during this period. Additionally there are penalties and fines in addition to the taxes themselves - often as much as 25% of the tax owed. States are more active in auditing companies to make sure of compliance, and the danger of being found is greater than ever.

And unpaid sales tax obligations might also affect your business valuation. In case you ever sell your business down the road, potential buyers will research your sales tax compliance history. Any outstanding tax liabilities could possibly lower your company's selling price.

How to Protect Your Business from Nexus Risks

The good news is the fact that you can protect your business from sales tax nexus risks. One of the best methods is through a nexus study. A nexus study examines your business in various states to determine where you owe sales tax. This is why it is a great idea :

• Ensures Compliance: A nexus study shows you where to collect and remit sales tax so you stay clear of expensive mistakes and penalties.
• Risk Management: Knowing your nexus obligations helps you mitigate your business tax risks and stay away from unpleasant surprises during audits.
• Strategic Planning: Knowing your sales tax responsibilities might also enable you to decide where you can expand your company, hire workers or buy stock.

Final Thoughts

Dealing with sales tax nexus can be complex, but it is critical to running a profitable business. Knowing how to establish nexus, tracking your sales thresholds and performing a nexus study can safeguard your business out of unexpected tax liabilities.

Keeping up with sales tax compliance will save you cash on fines, lower audit risks, and keep your company compliant in all states where you work. Evaluate your nexus obligations today to safeguard your financial future.

For expert advice on sales tax nexus and all outsourced tax preparation services, call The Fino Partners today.