Do you need to be collecting sales tax on the transactions you conduct online? Perhaps you already know that answer within your own state of residency, but what happens when your sales are conducted across state lines? While you may not need a sales tax nexus right out of the gates, it is important to be aware of your tax liability and keep it in mind for future growth. Since taxes can be confusing, let’s start with some simple definitions:
a relationship or connection between people or things
Sales Tax Nexus:
Nexus, aka “sufficient physical presence”, is a legal term meaning taxable connection or presence with a state. Your sales tax nexus determines whether you are required to collect sales tax and in which states (in addition to your state of residency).
What determines a presence, you ask? That varies from state to state, but can include a presence of people (employees, independent sales agents, affiliates) and/or property (office space, storing inventory, drop shipping from a 3rd party). A temporary presence may also mean you need to be collecting sales tax, like if you participate in a trade show or have traveling sales reps.
To make things even more complicated, there are also two types of nexus that apply to remote (aka online) sellers that make sales in other states.
Click Through Nexus:
“If an in-state online business leads a customer via links (“clicking through”) to buy something from the out-of-state online business, the out-of-state business is considered to have a presence in that state and must collect sales taxes from customers there.” – From Avalara
Again the laws will vary on this between states. Keep reading for more information on how to find out your liability.
Affiliate nexus tax legislation refers to an out of state retailer who “holds a substantial interest in” the in-state retailer, typically selling the same line of products, or uses the in-state retailer to increase sales in that state.
The tax experts over at Avalara recommend the following check list to ensure you are tax compliant:
- Know what states have laws that can create nexus for you through referrals/affiliates
- Know the minimum sales dollars that trigger applicable tax liability for click through nexus
- Know where your referrals are coming from, so you can keep tabs on how these laws apply to your online business.
You can find more information by using this interactive map to see the past and current legislation for each type of nexus in individual states:
Avalara is also a great resource and we highly recommend checking out their Guide to Click-through Sales Tax Nexus for Small Businesses