There’s a saying that the only two things that are unavoidable in life are death and taxes. Well, dealing with online sales taxes could make you feel like death. There are a lot of rules and regulations that go into understanding how sales tax nexus works and how you can make sure you are charging the legal amount. With this guide, we’ll do our best to make sure you fully understand how sales tax nexus works.
What is Sales Tax Nexus?
You probably already know what sales tax is, but what does nexus mean?
The Sales Tax Institute defines what Nexus means and how it relates to sales tax as “Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state.”
Sales tax nexus is crucial to running an online business because you will be selling to customers who do not live in the same state as you and you need to know what to charge for tax in these situations.
How Will Sales Tax Nexus Effect My eCommerce Business?
Katherine Gustafson from Quickbooks details a history of sales tax nexus and why it came to be. Online retail has changed the whole structure of sales tax and is still constantly changing. Katherine uses Derek Sasaki, co-founder and president of My Pet Chicken, as an example of how sales tax nexus might affect a small, online business.
“He relates how his company used to store some inventory in Pennsylvania, but had no employees based there. For a while, the company wasn’t required to pay sales taxes there, but then the state changed its definition of nexus to require businesses storing inventory in the state to pay.
My Pet Chicken was suddenly on the hook to file, a process that took time and money to execute. The company has considered moving its warehouse out of the state, but has stayed in Pennsylvania due to its satisfaction with its fulfillment company there and the cost and time it would take to move. Sasaki estimates that moving to another state would probably net out to about the same as paying the taxes does.” Read more…
How Do I Determine If I Should Charge Sales Tax and How Much I Should Charge?
TaxJar put together a very detailed and complete guide to sales tax nexus and how you can figure out what to charge. Sales tax varies from state to state, which can make your job as an eCommerce entrepreneur extremely difficult and confusing.
The first thing you will have to determine is if you have sales tax nexus in each particular state. This chart explains the most common examples of sales tax nexus, or “presence” in a state. You will have to determine your presence on a state-by-state basis, so you can contact each state’s taxing authority with Tax Jar’s helpful map that lists contact info for each state HERE.
This article will also teach you the difference between origin-based verses destination-based sales taxes and how to account for both. Origin-based means that you must charge sales tax based on the rate of the state of your warehouse’s or your base location. Destination-based means you must charge sales tax based on the location of the buyer.
Again, each state is different, so you must determine what to charge on a state-by-state basis.
Nolo.com provides a fantastic resource that will give the list of laws about sales tax nexus state-by-state. This is a great place to start when you are trying to determine your sales tax nexus and how much you should charge according to each state’s laws.
What If I Need Help?
Yettertax.com is a great resource for eCommerce entrepreneurs struggling with sales tax. Yetter provides you with education on sales tax, tax plan development and connecting you with technology that will help you determine sales tax nexus and what to charge.
Death and taxes: unpleasant, but unavoidable. As confusing as it seems, sales tax nexus is possible to conquer with time and effort. As an eCommerce entrepreneur, you’ll be facing a lot of challenges on your road to success, but don’t give up; we believe in you.
Let's Discuss: How has the Sales Tax Nexus impacted your eCommerce business and how have you learned to handle it?