Understanding Nexus
‍Sales Tax Obligations

Question 1

What is Physical Nexus?

Answer

In simple terms, if you have a physical connection to a state – through a building, people, or goods – you likely have a physical nexus there.

Physical Nexus is based on your tangible presence within a state. This is the traditional understanding of nexus, and it comes into play if your business has a physical footprint in a state. Examples are:

storing inventory or maintaining a warehouse (including goods sold through marketplaces such as Amazon)
owning or leasing just one office or having a mailing address
having an employee or independent contractor
having an affiliate
doing business only temporarily, such as by attending a trade show or using sales reps

Physical nexus is an easier net to be caught in since it is independent of your sales activity and the tax office has a tangible target. States are aggressively trying to collect taxes from businesses, so it pays to keep every possible trigger in mind. Some states are liberal on their definition of physical connection, so many activities can create physical nexus, including stuff that most businesses probably wouldn’t think constitutes a physical presence.

Question 2

What is Economic Nexus?

Answer

In simple terms, if you exceed a sales threshold for a State, through the number of transactions or total revenue, you likely have nexus.

If you have no physical connection to a state, you can create sales tax nexus based on your sales activity. This “economic nexus” is created based on either your number of transactions or total revenue.

For economic nexus to apply, you simply need to have final customers in the state who are paying for your product.

Question 3

What are the economic nexus thresholds?

Answer

Each state has the right to set their own thresholds, but almost half have employed a 200-order threshold, and the rest use a $100,000 level.

All states base the threshold on a year of sales, but the definition of a year can be different. For example, most define it as January to December, but some say 12 consecutive months.

Question 4

What should I do when I have nexus?

Answer

If you are deemed to have created nexus for sales tax in a state, you are legally obliged to register with that state. This will require applying for a sales tax ID or seller’s permit from the state tax office.

Question 5

How does nexus impact my business?

Answer

Make use of our ‘Nexus Monitoring‘ software, to alert you when you’ve reached Nexus in a state.

If you have sales tax nexus, you must apply for a sales tax ID or seller’s permit from the state. Once you have registered, you will be obligated to collect tax on your sales to that state, and file regular sales tax returns where you report your sales and pay over the tax you have collected.

Question 6

Does nexus apply to marketplace sellers?

Answer

Even though a marketplace facilitator (like Amazon or eBay) is responsible for collecting sales tax on their marketplace – your marketplace sales do count towards economic nexus in most states.

As a marketplace seller, most states will only consider it nexus if you have both marketplace sales and sales from your own website, but there are states who expect you to register for sales tax if you create nexus from marketplace sales alone.

Question 7

Do I collect tax before I have nexus?

Answer

You are not obligated or legally permitted to collect sales tax before you have a sales tax ID / seller’s permit. Once you have nexus, you should register with the state and start collecting sales tax immediately.

All sales that you made prior to creating nexus are not subject to sales tax, so you only need to start collecting tax after nexus is created.

Question 8

Can non-US businesses have nexus?

Answer

Yes, the rules of both physical and economic nexus apply to both businesses established in the USA and outside.

A business from the UK who uses a 3PL in a state is legally obligated to register the same way a US business is.

Similarly, if a California business ships over $100,000 sales into Florida, it is exactly the same as a German business who exports over $100,000 from Europe into Florida.

Both businesses will create nexus and should register and start collecting sales tax.

Understanding Nexus
‍Sales Tax Obligations

What is Nexus?

What to Do if You Have Nexus

Register for a Sales Tax permit.

Set up Sales Tax collection at the point of sale.

Report and file Sales Tax collected.

FAQs Nexus