What is Sales Tax Nexus?
The word nexus is Latin, meaning to bind, join or tie. Nowadays, a nexus, in general, means a connection.
Nexus, also called “sufficient physical presence”, is a legal term that refers to the requirement for companies doing business in a state to collect , report, and pay sales taxes on items they sell, which the state lists as taxable in that state. For example, if you sell goods or services in Dallas that are subject to sales tax, you must collect sales tax from your customers, then report to the state and pay the amount collected, according to Texas law.
How to determine, collect, report and file a Sales Tax Nexus?
Step 1: Determine If You Have a Sales Tax Nexus
Sales tax nexus occurs when your business has some kind of connection to a state. All states have a slightly different definition of nexus, but most of the time states consider a “physical presence” to create nexus.
Physical presence (qualified if you have any one of the above requirements):
drop from a 3rd party provider
physical business in a state for a limited amount of time: a trade show or craft fair
Step 2: Register for a Sales Tax Permit
Head over to your state’s taxing authority and register for a sales tax permit before you begin collecting sales tax from buyers. You will need to register for a sales tax permit in each state where your business has nexus.
It is important to have this permit to protect yourself from legal liabilities. If you collect without a permit, you’re collecting the sales tax in the state’s name, but putting it in your own pocket. This can lead to big penalties or even jail time in extreme cases.
Once you receive a registration number, you will be assigned a sales tax filing frequency. You’ll generally be assigned to file either monthly, quarterly or annually. The frequency is based on your expected sales volume in that state.
Step 3: Collect Sales Tax
If you have sales tax nexus in a state, then you must collect sales tax from buyers in that state. Sales tax rates will vary from locality to locality. This means you must determine the sales tax rate in that state, plus any local sales tax that might apply. For example, the sales tax rate in Plano (75025) is 8.25%. That includes a Texas state rate of 6.25%, plus a Collin County rate of 1% and a district rate of 1%.
If the business has stores in multiple states, it may have sales tax obligations in each location. Nexus can be created by employing sales people who work in other states. For example, if your employees or contractors conduct any work at a customer’s out-of-state location, you may have nexus there as well.
Examples of Nexus jurisdictions: A company with nexus in
Washington would select
United States in Country Jurisdictions
Washington in State Jurisdictions
Dallas, Texas, would select
United States in Country Jurisdictions
Texas in State Jurisdictions
Dallas in Local Jurisdictions
You should collect sales tax from buyers in every state where you have sales tax nexus. Food, clothes and supplements often considered non-taxable in many states. If you are selling a non- taxable item to a customer, you don’t need to charge them sales tax. Double check with state’s taxing authority about product taxability if you think you are selling a non-taxable item.
Step 4: Report and File Sales Tax Nexus (when and form):
Report how much sales tax you should file in each state, county, city and another district. Once you have figured out how much sales tax you’ve collected, you will need to file your sales tax return. Sales taxes are remitted based on where your business is actually located because it is the physical structure of the business that actually creates nexus. Based on your expected sales volume in that state, you can choose to file either monthly, quarterly or annually.
According to the Texas Administrative Code title 34, RULE §3.286
“Quarterly filers. Permit holders who have less than $1,500 in state sales and use tax per quarter to report may file sales and use tax returns quarterly. The quarterly reporting periods end on March 31, June 30, September 30, and December 31.
Yearly filers. Permit holders who have less than $1,000 in state sales and use tax to report during a calendar year may file yearly sales and use tax returns upon authorization from the comptroller.”
Various penalties apply for late filing of sales tax reports, failure to file the sales tax report, failure to pay and under-reporting. Check with your state for the applicable penalties.
Sales Tax Nexus Definition. (2015). Retrieved February 13, 2016, from http://blog.taxjar.com/sales-tax-nexus-definition/
Guanyi Yu-Master's Degree in Accounting Student at Naveen Jindal School of Management
Staff Accountant IAA CPA FIRM PLLC