For businesses operating across state lines in the U.S., understanding when and where to collect sales tax is crucial to staying compliant with state and local tax laws. Sales tax is governed by individual states, and the rules can vary significantly between jurisdictions. Therefore, if your business is expanding into a new state, it’s essential to know when you’re required to collect sales tax, how to comply with local regulations, and what factors trigger sales tax obligations.
This blog will explore the concept of “sales tax nexus,” which determines when a business is required to collect sales tax in a new state. We will discuss the various factors that create nexus, how to navigate state-specific rules, and how PEAK Business Consultancy Services can assist CPAs and business owners in ensuring that they meet sales tax obligations when expanding into new states.
What Is Sales Tax Nexus?
Sales tax nexus is the connection between a business and a state that obligates the business to collect and remit sales tax on sales made to customers within that state. Essentially, nexus is the threshold at which your business has enough of a presence in a state to be subject to its sales tax laws. This connection can arise from a variety of activities or circumstances that create a significant link between the business and the state.
In the past, having a physical presence in a state—such as a store, office, or employees—was generally sufficient to establish nexus. However, the rise of e-commerce and remote selling has complicated this concept, and states have adopted various economic and virtual nexus rules to determine when businesses are required to collect sales tax. It’s crucial for businesses, especially those expanding into new states, to understand these nexus rules and how they apply to their operations.
Factors That Create Nexus for Sales Tax Purposes
There are several factors that can create nexus in a new state. These factors depend on the nature of your business activities and the state’s tax laws. Below are the primary factors that can trigger a sales tax obligation in a new state:
1. Physical Presence Nexus
Traditionally, a business with a physical presence in a state was required to collect sales tax. This includes having:
- A brick-and-mortar location, such as a retail store or office
- Employees working in the state
- Independent contractors or agents working in the state
- Property or inventory stored in the state
If your business has any of these physical connections to a state, you generally need to collect sales tax on sales made to customers in that state. Even if you operate entirely online but maintain a warehouse or fulfillment center in a state, that could trigger nexus and require you to collect sales tax on orders shipped to that state.
2. Economic Nexus
In 2018, the U.S. Supreme Court ruled in the landmark case South Dakota v. Wayfair, Inc. that states can require businesses to collect sales tax even if they have no physical presence in the state, as long as they meet certain economic thresholds. This ruling expanded the concept of nexus to include economic nexus, which is based on the volume of sales or number of transactions in a state.
Under economic nexus rules, a business must collect sales tax in a state if it meets certain criteria, typically based on:
- Revenue thresholds: For example, a state may require businesses that generate more than $100,000 in sales to customers in the state to collect sales tax.
- Transaction volume: Some states set a threshold for the number of transactions (e.g., 200 or more transactions in a year) that triggers the obligation to collect sales tax.
These thresholds vary by state, so it’s important for businesses to track their sales and transactions in each state to ensure compliance with economic nexus rules. If you exceed these thresholds, you will need to register with the state’s tax authority and begin collecting sales tax on sales made to customers in that state.
3. Click-Through Nexus
Click-through nexus is another form of nexus that is often relevant for e-commerce businesses. This type of nexus occurs when a business has agreements with affiliates in a state who refer customers to the business through a website or other online platforms. If the business generates a certain amount of sales or revenue through these affiliate referrals, it may be required to collect sales tax in the state where the affiliate is located.
How Click-Through Nexus Works: If a business has affiliates or partners who earn a commission for referring customers to the business, and the business generates enough revenue through these referrals in the state, it creates a nexus obligation in that state, requiring the business to collect sales tax from customers in that state.
4. Marketplace Nexus
Marketplace nexus applies to businesses that sell products through third-party online marketplaces, such as Amazon, eBay, or Etsy. Many states have enacted marketplace facilitator laws that require online marketplaces to collect and remit sales tax on behalf of their sellers. If a business sells goods through a marketplace, the marketplace is typically responsible for collecting and remitting sales tax to the state, even if the business itself does not have physical presence or economic nexus in that state.
However, even with marketplace facilitator laws, businesses must be aware of the states in which they are selling products. Depending on the state’s rules, you may still be required to report sales and file sales tax returns even if the marketplace is collecting the tax.
When Do You Need to Start Collecting Sales Tax in a New State?
When expanding into a new state, it’s important to determine whether your business has established nexus in that state. If you do, you’ll need to start collecting sales tax on sales made to customers in that state. The timing of when you need to start collecting sales tax depends on several factors:
1. After Exceeding Nexus Thresholds
Once your business exceeds the nexus thresholds in a new state (either through physical presence, economic nexus, or other factors), you are required to register with the state’s tax authority and start collecting sales tax immediately. Some states may require businesses to begin collecting sales tax as soon as they meet the threshold, while others may allow a grace period before sales tax collection is required.
2. Registering for Sales Tax
Before collecting sales tax, you must register with the state’s tax authority. This typically involves completing an online registration form with the state’s Department of Revenue or Taxation. Once registered, you will be issued a sales tax permit, which authorizes your business to collect and remit sales tax in the state.
Tip: It’s important to register as soon as you establish nexus in a new state to avoid penalties for failure to collect sales tax.
3. Begin Collecting Sales Tax
Once registered with the state tax authority, you can begin collecting sales tax on all taxable sales made to customers in that state. Make sure to apply the correct sales tax rate, as rates can vary by state and even by local jurisdiction within the state.
How PEAK Business Consultancy Services Can Help
PEAK Business Consultancy Services specializes in U.S. sales tax compliance and can help businesses navigate the complexities of collecting sales tax in new states. Whether you are a small business expanding into new markets or a CPA managing multiple clients, our team of experienced tax consultants can assist you in understanding your sales tax obligations, determining nexus, and ensuring compliance with state and local tax laws.
We can also help businesses register for sales tax permits, collect and remit sales tax correctly, and file sales tax returns on time to avoid penalties. With our expertise, you can focus on growing your business while staying compliant with the ever-changing sales tax rules across states.
Visit www.peakbcs.com to learn more about how PEAK Business Consultancy Services can assist with your sales tax compliance and other U.S. tax services.
Conclusion
Expanding your business into a new state brings new opportunities, but it also comes with the responsibility of understanding and complying with sales tax laws. By understanding the concept of nexus and identifying the factors that require you to collect sales tax, you can avoid costly mistakes and stay compliant with state regulations.
If your business is expanding into new states or if you’re unsure about your sales tax obligations, PEAK Business Consultancy Services is here to help. Our team of experts can guide you through the process of understanding nexus, registering for sales tax, and ensuring that your business remains compliant with all applicable sales tax rules.
Contact PEAK Business Consultancy Services today to discuss your sales tax needs and learn how we can help your business thrive while staying compliant with state and local tax laws.
