Posts Tagged ‘Sales Tax Nexus’

To Collect or Not to Collect? Understanding Sales Tax Nexus

If you sell products and services across state lines, are you liable for collecting sales taxes? The answer is more complicated than you think nowadays – and it rhymes with “Lexus.”

The concept of sales tax nexus, or whether you have a business presence in another state subjecting you to liability for sales tax collection, has evolved considerably in recent years. Once upon a time, common wisdom was that you had to have a physical, bricks-and-mortar presence in a state to create nexus. Today, there are numerous additional forms of nexus that you should be aware of.

You can thank online sales for many of these changes, in response to states losing sales tax revenue to such sales over time. Add this to the fact that nearly all sales are technically subject to state sales tax – with nexus simply shifting liability for collecting and paying these taxes to the seller – and you have a new landscape for businesses who sell on a regional or national scale.

Recent forms of sales tax nexus

Here are some of the more common new forms of nexus nowadays, as described by the Sales Tax Institute:

Click-through nexus: This normally occurs when you meet a minimum threshold of sales in another state, referred to you via the website of an affiliate in that state who receives commissions for these sales. Some state courts have held that this also extends to the “goodwill” of a brand name, such as a recent New Mexico case claiming that people shop on barnesandnoble.com as a result of the presence of physical Barnes & Noble stores in the state.

Affiliate nexus: This refers to cases where you own, are owned by, or have a substantial interest in an affiliate in another state that is used to “advertise, promote, or facilitate sales to an in-state consumer.”

Marketplace nexus: This requires online marketplaces operating their business in a state – and providing services such as e-commerce, customer service, payment processing, and marketing – to collect sales taxes on behalf of their individual sellers.

Economic nexus: This is the broadest new sales tax nexus category of all: in some states, transacting more than a certain sales volume within a state may create nexus, even if your business has no physical presence or affiliate relationships in that state. This form of nexus was ushered in by the landmark 2018 Supreme Court ruling in the case South Dakota vs. Wayfair, giving any state the right to establish economic nexus.

The presence of each of these forms of nexus varies from state to state: this chart from the Sales Tax Institute outlines which states employ them, and is kept up to date as laws change, so it is well worth bookmarking. Also, be aware that these forms of nexus all exist on top of numerous previous criteria for nexus, ranging from remote employees to selling at out-of-state trade shows. This makes competent legal and accounting advice a must for determining your particular business’s situation.

How we can help with sales tax nexus

So how can businesses – particularly smaller ones – make sense of this new world of sales tax collection?

First, the bad news: you first need to determine where you have nexus, based on the particulars of your business and its sales. Only you know whether you have operations in another state, or meet any of the other conditions that create nexus. However, this is normally a straightforward process that is done once, and subsequently only evolves with changes in your business or state laws.

Next, the good news: once you have determined that you have nexus in a particular state, you can automate the process of sales and use tax calculation. And that is a very good thing, because state and local taxing jurisdictions vary widely, sometimes even within the same city or ZIP code! Our DOTS FastTax service makes life simple for you: specify an address, and we’ll give you a complete and accurate breakdown of its tax rates, including state, county, city, district, and special district rates.

FastTax uses tax data that is continuously synchronized with state and province updates, and is integrated with geolocation and our federally-certified address validation capabilities to ensure accurate location and tax results. Combined with your own good visibility on sales tax nexus issues, we can work together to make your nationwide sales process smooth, convenient, and compliant with tax regulations wherever you do business.

Business professional researching tax rates and using calculator

Calculating Sales and Use Tax: Leave the Hard Work to Us

A quick Google search will turn up lists of the worst jobs in the United States, ranging from simply gross (like tasting pet food) to the most dangerous (logging, according to the Bureau of Labor Statistics). We would like to add our vote to the list: calculating sales and use tax.

First of all, let’s be honest: at least some of you out there don’t actually know the difference between sales and use tax. (Here’s a hint: sales tax is collected from consumers, normally but not always, exclusively on in-state purchases. Use tax is paid in lieu of sales tax, by consumers on out-of-state purchases in many states, as well as wholesalers who buy goods that eventually become used in a taxable manner. For more detail, Sales Tax Institute offers a great resource on the difference between sales tax and use tax.)

Once you get that far, you’ll spend a significant amount of time figuring out tax jurisdictions. At what level do you determine sales and use taxes: the state level? The county level? Within a particular ZIP code? The answer to all of these is yes and no. Some states charge no sales or use taxes at all, others have different levels of sales versus use taxes, and still others have taxing jurisdictions that can vary by city or even from street to street. Keeping track of it all could easily become a second career – which is where we come in.

FastTax: new and improved tax calculation for 2019

Our DOTS FastTax service has always provided location-based sales and use tax rates and data, and has long leveraged our flagship DOTS Address Validation service to provide precise tax data for accurate US addresses. This year, we’ve made FastTax even more powerful with the addition of three new features:

  • The GetBestMatch operation that can analyze even bad addresses to obtain accurate tax data, often at a more precise level than ZIP codes.
  • The IsUnincorporated flag that allows you to bypass city tax rates in unincorporated areas. (And a new UnincorporatedTaxRate will be returned in a future release, to simplify this further.)
  • We’ve also added full support for US offshore postal territories such as Guam and Micronesia.

For a deeper dive, read our post on FastTax improvements, written by Jonas Shaefer, Director of Engineering.

Tax calculation designed for your applications environment

As always, our real-time API capabilities allow seamless integration with your sales and order entry automation environments. with a focus on data quality and ease of integration. We support REST, SOAP, GET and POST requests in XML and JSON formats, compatible with all major programming languages. Want to see for yourself? Check out our Developer Guide and sample code segments online. You can even get a free trial key to test in your developer environment right now on FastTax’s product description page.

With the help of Service Objects, calculating sales and use tax is no longer one of the worst jobs in America – except for our engineers and data source partners, of course. (But don’t worry, we actually enjoy it.) Need more information on implementing FastTax with your applications? Contact us to speak with one of our product experts, and we’ll help make your sales and purchasing work is a lot less taxing.

Determining Sales Tax Nexus: It’s Trickier Than You Think

If you sell products nationally, do you need to collect state or local sales taxes? The answer may be more complicated than you think.

In the United States sales taxes are levied at the state and local level, and normally need to be collected by you for sales in state(s) where you operate. (Fun fact: in other states they are often still due from the consumer, through what are known as consumer’s use taxes. The question becomes whether you, as a business, need to collect them at the time of sale.) As for these other states, your obligation to collect sales taxes depends on whether you have what is called nexus in these states.

Understanding nexus

The obvious case of sales tax nexus is when you have a physical, bricks-and-mortar sales presence in another state: for example, if I purchase a sweater online from Cincinnati-based Macy’s, they collect sales taxes for my home state of California because they also have physical stores here. But many other situations that can trigger nexus as well – here are some examples:

Employees and contractors. According to the Sales Tax Institute, having a “representative, agent, salesman, canvasser, or solicitor” in another state who is under your control, even temporarily, can create nexus. And in some states any telecommuting employee – selling or not – may trigger nexus.

Selling online. Laws are changing to recognize the huge shift in retail commerce from Main Street to online merchants. Thanks to a recent June 2018 Supreme Court decision, states now have the option of requiring online sellers to collect sales taxes for their states. In addition, more than 20 states now have what is known as “click-through nexus” for cases where you pay referral fees to in-state affiliates for sales via their web pages, usually triggered by a specified minimum volume of sales in that state.

Trade shows. If you sell products or solicit business at an out-of-state trade show – for example, by having a booth in the exhibitor hall that sells products or distributes literature to attendees – you may or may not be on the hook for sales tax nexus. State rulings vary widely, and while most differentiate between selling activities at a conference versus simply listening to speakers and eating mediocre banquet food, even one day of marketing activities can trigger nexus in some states.

When to bring in the pros

This brings us to an important closing point: determining your sales, local and use tax obligations isn’t a job for amateurs. If your business is large enough and does business nationally, it makes sense to contact a tax professional for guidance on where your business has nexus.

Once you have determined where you have nexus, you also need an automated tool to help you navigate a potential maze of state, local and special tax rates for each customer. Tax rates change constantly, and can literally vary from street to street within the same ZIP code, so this isn’t a do-it-yourself project for most businesses. Our DOTS FastTax service provides accurate, detailed tax rate data on an address-by-address basis, using an API interface that integrates seamlessly with major marketing or CRM platforms.

Want to learn more? Contact our experts to discuss your specific sales tax needs.