In essence, everything sales-tax related boils down to which states you’ve activated a connection. However, as every state has a different definition of that connection, navigating it can be complex, even at the best times. Fortunately, we’ve got you covered. Here’s everything you need to know about nexus and its implications for your sales tax.
Nexus 101: The Basics
To understand the basics of nexus, we need to take a step back (way back) and look at the word’s origin. ‘Nexus’ is a Latin word meaning to tie, connect or bind. Simply put, it means you’re connected. However, the term is now synonymous with confusion and anxiety in the tax world. Why? Because ‘connection’ is subjective, and every one of the 45+ US states has put its own spin on what it means to be connected to them regarding sales tax liability.
But fortunately, you don’t have to settle for dealing with the complexities of navigating your sales tax connections – we’ve got your back. Here’s the deal.
The different types of nexus
Although each different state has specific rules and requirements regarding nexus, they all recognize two overarching types of connections;
A physical connection is determined by the physical location of your business and employees (permanent or temporary). The key triggers that activate a physical nexus include:
- Your physical location in a state (office, home office, co-working space, warehouse, server equipment, or data centers).
- You have out-of-state employees (including remote employees) that work in a nexus state.
- Your employees are temporarily in a location for business purposes such as trade shows, events, or conferences.
An economic connection refers to a business’s financial connection to a state and its sales tax liability. Generally, this nexus is triggered by a sales or transaction threshold. Each state has a different economic threshold. For example, California’s Nexus threshold is reached at $500,000 in sales only, whereas, in Arkansas, you can trigger an economic nexus at $100,000 in sales or 200 transactions.
If you activate a nexus, your business must register and collect sales tax per state-specific regulations.
You’ve triggered a nexus; now what?
As soon as you’ve triggered a nexus, you must register in the relevant state and collect sales tax from buyers there. But (you guessed it), it gets more complicated. All states also have different requirements and rules regarding the registration process after you’ve activated your nexus.
For example, North Carolina expects businesses to register and collect within 60 days of activation. California, however, requires immediate registration upon threshold activation.
Monitoring your sales and transactions per state is paramount regarding sales tax compliance. But as the nexus rules in each state are prone to change, keeping up to date with your nexus and no-nexus sales and the relevant thresholds can be tiring and unforgiving. Miss a beat and sell without registering in the right state? Then, strap in to be held responsible for any financial fines and the overdue tax rate that was supposed to be added to each transaction made.
- Calculate what you owe
Once you know in which states you have a sales tax nexus and are registered in all relevant states, you need to calculate the correct rate to charge customers. These sales tax rates depend on the following:
- The state tax rate
- The local jurisdiction’s sales tax rate
- Your product or service
- Whether your client is exempt or not
Manually calculating the correct rates is time-consuming, error-prone, and taxing (pun intended). For example, did you know New York State has more than 1,200 different rates? Due to the complexities of managing the correct rates, it’s best recommended to find a sales tax solution that integrates with your transaction system of choice and calculates your sales tax on the system, whether you’re working on a billing platform, ERP, accounting software, or payment gateway.
- Start filing returns
After determining the sales tax due and charging your customers, your business is responsible for filing the correct sales tax returns and remitting the sales tax liability in each jurisdiction. This process is determined by designated filing requirements and deadlines that, once again, differ depending on local and state jurisdiction. In addition, to correctly file sales tax returns, businesses must register for the appropriate sales tax type (sales tax vs. seller’s use tax vs. vendors’ tax).
For example, if you’re a retailer in Massachusetts selling to customers based in Michigan, you’ll have to remit sellers’ tax to Michigan. However, if you sell the same product to a client in your origin state, you’d owe sales tax to your origin state.
Navigate nexus effortlessly with Complyt
It’s time to admit that there are better ways to spend your time than losing sleep over non-compliance, navigating nexus and the complexities of calculating tax rates. Replace the work (and worry) with an all-in-one automated sales tax solution.
Manage your nexus and sales tax obligations on auto-pilot as Complyt enables you to confirm where you have a connection to a specific state and manages everything that comes along with it.
Absolute clarity, confidence and compliance starts here.