US Sales Tax & Sales Tax Nexus - A Complete Guide

US Sales Tax & Sales Tax Nexus - A Complete Guide

Vivien
Vivien
Table of Contents
Table of Contents

Having the right knowledge and information about  sales tax is crucial for your business so  you can charge and remit accurate sales tax to the tax authority and remain compliant at all times.

Although the US sales tax system can be tricky at times, we are here to explain to you how the system works in a simpler way.

So let's not keep you waiting and jump right in.

Do I have to charge sales tax?

To start, you need to ask yourself questions related to the sales tax in your state.

Here are some of the things you need to note before collecting sales tax to your consumers:

  1. Check whether the state you are doing business has sales taxes, also known as nexus. This can be your home state too
  2. If you are a remote seller, or online sellers, do ensure you are up-tp-date to your state’s internet tax regulation as it is constantly changing
  3. Find out whether you are selling products or services, or a hybrid. You need to check whether the products or services are taxable
  4. Determine whether the location of your business is origin-based tax or destination-based tax

What is a "Sales Tax Nexus"?

According to the dictionary, the word “Nexus” simply means “a connection or a series of connections linking two or more things”.

For example, nexus can refer to the meaningful relationship between a teacher and a student. Or, even the unbreakable bond between mothers and daughters.

Sounds simple, isn't it?

But, do you know the meaning of Nexus in the tax regulation context?

In the tax terminology, Nexus means the connection between the tax authority in a state with the business. So, you either have Nexus in a state, or you don’t have Nexus in that at all.

It’s your responsibility to keep yourself up-to-date regarding the tax-related information for that state once you have established Nexus with a state,

You are obligated to collect, report, and remit sales tax for your business transactions to the tax jurisdiction for doing business in that state.

How is the sales tax nexus triggered?

Business owners with a physical presence in a state could trigger the nexus for their business.

For example, it’s fairly easy to trigger nexus for brick and mortar stores due to their physical presence in that state.

Once you have your physical store up and running, you automatically established the connection between the tax jurisdictions and your business.

However, what defines physical presence other than having a physical store?

Stated below are a few examples that define physical presence other than business location:

  • Having an employee, salesperson, or contractor
  • Having property; that can be tangible or intangible personal property
  • Having your inventory stored in a warehouse or storage facility in a state
  • Having an agent, salesman, agent or third-party representative engaging in your business activities
  • Having a drop shipping relationship - You have third party provider that help you ship goods to the buyer
  • Having third party affiliate or referral in a state

What about nexus for online sellers?

You must be over the moon knowing that you didn’t fulfill any of the nexus requirements above. It means you can avoid the hassle of collecting sales tax if you have an online business.

But, hey, don’t get too excited yet.

Sit back and read more to uncover the tax changes over the years.

Back in 1992, remote sellers that were selling to other states didn’t have to charge and remit sales tax in the buyer’s state. As long as you do not have a physical presence in the state, you are safe.

Data source: Statista

Many states feel that they have the right to collect sales tax from the online businesses, especially with the rise of the eCommerce market. States feel that they are losing out.

Decisions are finalised by the Supreme Court on June 21, 2018.

South Dakota . Wayfair, Inc., overruled the traditional rules of collecting sales tax; states can now require ecommerce businesses to pay sales tax where they do not have physical presence as long as they have economic nexus in that state.

In short, onliner sellers are no exception when it comes to fulfilling their sales tax obligations for interstate commerce.

**Since the requirement for sales tax collection differs for each state, it’s advisable that you consult your tax consultant before taking any actions.

What are the different types of sales tax nexus?

Economic Nexus

You trigger economic Nexus in a state when you reach $100,000 in sales or 200 transactions in a state annually, in general, regardless if you own a brick and mortar store, or an online seller.

However, each state with an economic nexus has its own threshold. Hence, you need to know the economic nexus in that specific state.

In 2021, there are 44 states, Washington D.C. included, have economic nexus rules.

To make your life easier, we have prepared the chart showing the economic nexus details by state. Have a look at the simplified table below!

State

Threshold Amount

Alabama 

$250,000 in sales

Alaska

$100,000 in statewide sales or 200 transactions

Arizona

$100,000 (2021) in sales

Arkansas

$100,000 in sales or 200 transactions

California

$500,000 in sales

Colorado

$100,000 in sales

Connecticut

$100,000 in sales and 200 transactions as of July 1, 2019

Georgia

$100,000 in sales or 200 transactions as of January 1, 2020

Hawaii

$100,000 in sales or 200 transactions

Idaho

$100,000 in sales

Illinois

$100,000 in sales or 200 transactions

Indiana

$100,000 in sales or 200 transactions

Iowa

$100,000 in sales

Kansas

N/A - All businesses that sell in the state have economic nexus

Kentucky

$100,000 in sales or 200 transactions

Louisiana

$100,000 in sales or 200 transactions

Maine

$100,000 in sales or 200 transactions

Maryland

$100,000 in sales or 200 transactions

Massachusetts

$100,000 in sales

Michigan

$100,000 in sales or 200 transactions

Minnesota

$100,000 in sales or 200 or more retail sales

Mississippi

$250,000 in sales

Nebraska

$100,000 in sales or 200 transactions

Nevada

$100,000 in sales or 200 transactions

New Jersey

$100,000 in sales or 200 transactions

New Mexico

$100,000 in sales

New York

$500,000 in sales and 100 transactions

North Carolina

$100,000 in sales or 200 transactions

North Dakota

$100,000 in sales

Ohio

$100,000 in sales or 200 transactions

Oklahoma

$100,000 in sales

Pennsylvania

$100,000 in sales

Rhode Island

$100,000 in sales or 200 transactions

South Carolina

$100,000 in sales

South Dakota

$100,000 in sales or 200 transactions

Tennessee

$100,000 in sales

Texas

$500,000 in sales

Utah

$100,000 in sales or 200 transactions

Vermont

$100,000 in sales or 200 transactions

Virginia

$100,000 in sales or 200 transactions

Washington

$100,000 in sales

Washington D.C.

$100,000 in sales or 200 transactions

West Virginia

$100,000 in sales or 200 transactions

Wisconsin

$100,000 in sales or 200 transactions

Wyoming

$100,000 in sales or 200 transactions

There are  states that do not have any economic nexus laws in place such as Delaware, Florida, Missouri, Montana, New Hampshire and Oregon.

Out of the six states, Delaware, Montana, New Hampshire, and Oregon do not have sales tax.

In addition to that, Alaska also does not have sales tax as well. However, some localities in Alaska enforce economic nexus.

Click-through Nexus

To the online business owners that drive sales revenue from affiliate programs, or click-through marketing, this is definitely the section you need to focus more on.

So, what is a click through Nexus?

A click-through nexus is applied to out-of-state sellers with no physical presence in the state, whereby they have sales transactions from in-state affiliates or referrals.

If you don’t quite understand this, we will give you one example.

Let’s say if you have a physical store selling sportswear equipment in Indiana. You’re selling your customers in New York, whereby you do not own any office, property, or inventory in this state.

It’s your affiliate in New York that helps you boost sales revenue via the affiliate program, promoting your products on their website; www.sportywear.com.

In this case, congratulations, as you have triggered the click-through nexus in New York.

You can refer to the table below to see if you have established click-through nexus with any of these states mentioned.

Note: There are five states that have repealed the click-through nexus and they are; Arkansas, California, Colorado, Ohio and Washington.

State

Threshold Amount

Connecticut

More than $100,000 and 200 retail transactions in Connecticut during the preceding 12-month period (previously $250,000 threshold)

Georgia

More than $50,000 in the preceding 12 months

Idaho

More than $10,000 during the preceding 12 months

Illinois

More than $10,000 during the preceding four quarterly periods

Kansas

More than $10,000 during the preceding 12 months

Louisiana

More than $50,000 during the preceding 12 months

Maine

More than $10,000 during the preceding year

Michigan

More than $10,000 during the immediately preceding 12 months and annual sales in the state of more than $50,00

Minnesota

More than $10,000 in the 12-month period ending on the last day of the most recent calendar quarter before the current calendar quarter

Missouri

More than $10,000 in the preceding 12 months

Nevada

More than $10,000 during the preceding four quarterly periods

New Jersey

More than $10,000 in the preceding four quarterly periods

New York

More than $10,000 during the preceding four quarterly periods

North Carolina

More than $10,000 during the preceding four quarterly periods

Pennsylvania

No threshold

Rhode Island

More than $5,000 during the four preceding quarterly periods

Tennessee

More than $10,000 during the preceding 12 months

Vermont

More than $10,000 in the preceding tax year


Marketplace Nexus

Do you know that:

  • $2.67 trillion spent globally on the top 100 online marketplaces in 2020
  • Gross merchandise sales grew 29% last year
  • 50 marketplaces are based in the U.S., and they grew sales 40% in 2020
  • Amazon’s third-party GMV grew 40% last year

Before we dive deeper, ask yourself this question - are you an Amazon, Etsy, eBay, Shopify, Walmart or other types of marketplace sellers?

If yes, do stay tuned, as this information might be useful to you.

Several states have created new legislation that requires marketplace facilitators to collect and remit sales tax on behalf of the marketplace sellers.

These laws are significant because they shift the obligation to collect and remit sales tax from the seller to the platform that facilitates the sale (the marketplace facilitator).

Stated below are the states with marketplace nexus in place:

Determine if you're in origin-based or destination-based state

When navigating the US Sales tax system, it is crucial to understand sourcing - also known as the location where the transaction is taxed.

As a seller, you must be aware of whether your state is destination-based or origin-based.

Most states and the District of Columbia are destination-based. The remaining 11 states are origin-based.

Origin sales tax means that the transaction will be taxed with the sales tax rates of the state where the seller is based.

The 11 origin-based states are:

  • Arizona
  • California*
  • Illinois
  • Mississippi
  • Missouri
  • New Mexico
  • Ohio
  • Pennsylvania
  • Tennessee
  • Texas
  • Utah
  • Virginia

For the state of California, there is a mix of destination and origin sales tax. The city, county, and state sales taxes are origin-based while district sales taxes are destination-based.

Destination sales tax means that the transaction will be taxed with the sales tax rates of the state where the buyer takes ownership of the product.

Most of the states in the US have a destination-based sales tax, and the states are listed below.

  • Alabama
  • Arkansas
  • Colorado
  • Connecticut
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Nebraska
  • New Jersey
  • Nevada
  • New York
  • North Carolina
  • North Dakota
  • Oklahoma
  • Rhode Island
  • South Carolina
  • South Dakota
  • Vermont
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

Determine if your products and services are subject to sales tax

Product classification is crucial in order to determine whether the products and services are liable for the sales tax in the US.

Good news is that not all types of products and services are taxable, depending on the states that are involved during the business transaction.

States below are the transactions exempted from sales tax:

  • Raw materials - If you produce or sell raw materials that are used in the production of other goods, then, the raw materials are exempted from sales tax. This includes grocery item for human consumption
  • Prescription drugs and certain medical devices
  • Resold items - Both resellers and retailers are exempted from paying sales tax on wholesale purchases
  • Nonprofits charitable, religious and educational organizations - Any sales made to the parties highlighted are exempted from sales tax in some cases, if tax exemption certificate is provided
  • Sales tax holiday - States will exempt or reduce sales tax holiday during certain seasons, or periods in a year. For example, typically, during bad weather or back to school season, sales tax are exempted for back-to-school items to encourage spending

What to do if you have triggered sales tax nexus?

Once you have determined that you need to collect sales tax in a certain state, next, you will need to go to your state's taxing authority to register for your sales tax permit.

It's easy to register for your sales tax permit as the registration can be done online.

So, do make sure that you have all the information related to your business, especially your Federal Employer ID Number.

With the sales tax permit, you can then collect, report, and pay sales tax on taxable items to the respective state.

Key Takeaways

And that's a wrap.

By now you would have developed the understanding of how US sales tax works, what is sales tax Nexus, the types of Nexus, the criteria the trigger sales tax in different state and more that you need to be aware of. We covered the following topics in the article:

  • Do I have to charge sales tax?
  • What is a sales tax Nexus?
  • What are the criteria of sales tax nexus?
  • What about Nexus for online sellers?
  • What are the different types of Nexus?
  • Determine if you're origin-based or destination-based state
  • Determine if your products and services are subject to sales tax
  • What to do if you have Nexus?

US sales tax can be complicated, with the various rules and regulations in each state. In addition to that, the US sales tax are subject to change from time to time. Do check with your tax consultant or tax authority in case you need better clarity regarding your sales tax query.

Getting an accounting software can help you with the sales tax calculations and filing. You can try Deskera free and use it to manage your tax calculations, accounting and sales tax reporting.



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