Sales Tax Nexus: What Online Vendors Need to Know
Sales tax nexus presents a unique challenge for online sellers. Traditionally, business owners collect sales tax in the states they have a physical presence. But with the rise of ecommerce, the game has changed. Due to the complexity of sales tax laws that vary state to state, consult your accountant or lawyer for advice on your specific sales tax situation.
Nationally, sales tax makes up about a third of the average state’s tax revenue. As more vendors move online, state legislators are changing the rules for sales tax.
Without a brick-and-mortar business, ecommerce sellers still need to collect sales tax. If you are an online vendor, you need to follow your state’s nexus laws and collect sales tax.
What is sales tax?
Sales tax is enforced by state and local governments on goods and services. As a business owner, you need to collect sales tax, record it in your accounting books, and remit it to the correct government agency.
Sales tax is a pass-through tax. The customer pays the sales tax at the point of sale and the business passes the money on to the government.
In some situations, you do not have to collect sales tax. Depending on the state, some goods and services are exempt from sales tax. For example, in Nevada, grocery products are not subject to sales tax. You also need to pay attention to sales tax holidays. When your state has a sales tax holiday, you do not collect sales tax for some items.
Delaware, Montana, New Hampshire, and Oregon do not impose a sales tax.
Some states use a home rule, even though they do not impose a sales tax. In home rule states, local governments can collect sales tax. Home rule states are Alabama, Alaska, Arizona, Colorado, Idaho, and Louisiana.
To find out if a state is subject to sales tax, check with the state’s Department of Revenue. If the state requires you to collect a sales tax, you will need to know your responsibilities.
What is nexus?
Sales tax collection starts with one important concept: nexus. Nexus is a business presence in a state.
If you have nexus in a state with sales tax, you must collect sales tax from all buyers in that state. You need to collect sales tax in states where you have nexus, even if that’s not the state where you run your business.
But, you do not have to collect sales tax from states where you do not have nexus. If your business has no presence, you do not collect sales tax from buyers in that state.
Every state handles nexus and sales tax differently. Check with your state’s Department of Revenue to learn more about your nexus rules.
Examples of nexus
Nexus can take several forms, and the rules may be different from state to state. Check the rules for the state you think you have nexus in before charging sales tax.
Here are common examples of sales tax nexus:
Home state nexus is in the state where you live and operate your business. You need to collect sales tax from any buyers located in the same state as your business.
Warehouse, inventory, and storage locations may also be part of your nexus. If they are in a state different from your business’ state, you may need to collect sales tax in that state. For example, if you operate your business from Virginia and have a warehouse in California, you might need to collect sales tax from both Virginia and California.
Employee nexus includes states where your employees, contractors, and salespeople are located. If you have employees in different states than you, you might have to collect sales tax from customers in those states too. Rules for employee nexus vary depending on the state and type of work the employee performs.
Drop-shipping suppliers and fulfillment houses can be considered nexus. Third-party providers ship orders directly to your customers. You might need to collect sales tax from customers located in the same state as your third-party suppliers.
Trade show attendance in the last 12 months creates nexus in a state. You need to collect sales tax in states where your business was at a trade show. Depending on the state, rules for trade show attendance nexus vary.
Collecting and remitting sales tax
Once you find out which state you have nexus in, you need a sales tax permit from that state. If you have nexus in multiple states, you might have to get multiple permits—one for each state. It’s illegal to collect sales tax without a permit, so get it before collecting.
States set sales tax rates. Then, local governments can add a percentage on top of the state rate. Each time you collect sales tax in a different location, you should check the state and local rates.
After you collect the sales tax, remit the funds to the appropriate government agencies. For example, if you collect sales tax in Virginia, remit the sales tax to Virginia’s Department of Revenue.
Sales tax nexus for online sellers
You don’t have a brick-and-mortar business, but you still have to collect sales tax. Even as an online merchant, you have nexus. And nexus determines which customers need to be charged sales tax.
As an online seller, you must collect sales tax from customers in your own state. For example, you run your online business from your home in Ohio. You must collect sales tax from any customers who are located in Ohio.
Online merchants must also collect sales tax in other states where they have nexus. If you have a presence in a state other than your main business location’s state, you must collect sales tax in that state.
For example, you operate your online business from New Mexico. You also have a warehouse full of inventory in Arizona. You must collect sales tax from customers located in New Mexico and Arizona.
To determine which states you …read more
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