The changing retail landscape of 2020 and 2021 has made the charging of sales taxes an important factor in online sales. Knowing how to handle sales tax is an important part of running a successful business, with the rise in online sales leading to problems for online retailers. Sales tax problems include understanding the economic nexus, which came into play with the rise of the Quill office supplies brand.
South Dakota took the Wayfair brand to the Supreme Court in 2018 to determine how sales taxes will be charged for online sales. Knowing if your state is part of the nexus is not as important as understanding if the states you are selling your goods to will charge you sales taxes.
What is the Nexus?
The Quill Supreme Court decision made a definite ruling that sales taxes were only applicable when a brand had a physical or economic presence in a state. The Sales Tax Institute reports the Quill decision caused problems for state taxation agencies by limiting the companies they could chase for missed payments. The South Dakota decision has become a major bonus for struggling state and local governments who have seen their general funds diminished during the pandemic.
The state of South Dakota decided to take their case to the highest court in the land as it felt the lack of sales tax charges was unfair. The Supreme Court stated the arrival of online retailing had changed the landscape forever and allowed states to create a nexus.
There are several different types of nexus, with the economic version allowing states to charge sales taxes on products and services sold to customers in their state. Several states, including South Carolina, have begun asking tax filers if they have purchased products or services from Amazon that could be liable for taxation.
Every Business Establishes a Tax Nexus
A common misconception about the role of the economic nexus is that it only applies to online retailers. In reality, a brick-and-mortar store creates an economic nexus when it sells products in its home state. The Blueprint reports every brand selling products within a state establishes a nexus for taxation that will continue through the current year. The most important question is whether your company is required to pay sales taxes in the states you are conducting business in.
How to Know if you are Part of a Nexus?
Each time a company makes a sale to an out-of-state client, they are opening up the potential for a sales tax bill. The starting point for any business is to keep an accurate record of every sale and the state they are conducting business in. Even when a brand is selling products through a large marketplace, such as Amazon, the seller is responsible for taxation issues. For online retailers selling goods through marketplaces, the responsibility for paying sales taxes is placed on their shoulders.
For those who have established a nexus, the next step is to calculate the taxes to be paid. Contacting the state taxation agency you have created a nexus with is vital to understanding the rules you must work within. Without the correct knowledge, you will struggle to remain on top of your sales tax issues.
Several forms of tax software are available that can determine if you are responsible for nexus sales tax payments. The software is capable of calculating your sales taxes and ensuring you don’t pay more than required.
Have you met the Threshold?
There are several rules regarding the nexus you may find yourself involved with. The most important aspect of nexus rules you will face is the minimum sales threshold established by each state. Each state has the right to determine its own threshold levels, with the majority looking to create thresholds of $100,000 or $250,000.
Even if you have not met the economic threshold, you should be aware of the other rules that may apply to your sales. Taxes are charged to those who meet a minimum number of transactions in several states. For example, Arkansas charges taxes when a seller completes 200 transactions to buyers in the state.
The range of values in the thresholds regarding sales is large. The state of California requires a seller to have completed $500,000 in sales within the state before sales taxes apply. The majority of states have set their threshold at $100,000 or 200 transactions, which means small business owners will often not need to worry about the nexus.
By the start of 2021, more than 40 states had enacted nexus legislation. the aggressive attempts to recover the lost revenue by state tax collectors have muddied the waters of online sales at a difficult economic time. The COVID-19 pandemic has driven the majority of retailers to online sales platforms. Completing a successful switch to online sales means being aware of the problems of the sales tax nexus.
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