Nexus definition
/What is Nexus?
Nexus is a link between a business and the territory governed by a taxing authority. Whenever nexus can be established, a company must charge customers for taxes related to that taxing authority and remit the collected taxes to the taxing entity. Given the multitude of taxing entities in the world, it makes sense to minimize nexus, thereby reducing the number of tax remittance and reporting obligations of the business.
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When Nexus Exists
Nexus is considered to have been established if a company maintains a facility of any type within the borders of the taxing authority. Alternatively, nexus exists when a company pays the wages of an employee located within the borders of the taxing authority. Some taxing authorities have expanded the definition of nexus in order to generate more tax revenue. Their view includes the preceding items, plus the following ones:
A company uses its own vehicles to transport goods inside of the borders of the taxing authority
A company sends its employees into the borders of the taxing authority in order to make sales calls, conduct training, and so forth, despite not being based within the region
A company sells data from a server that is physically located within the borders of the taxing authority (even if the server is owned by a third party)
In addition to the preceding criteria, the Supreme Court established in South Dakota v. Wayfair that a seller into a region can be required to collect sales taxes if the seller surpasses a minimum sales threshold. Most states set a threshold value of $100,000 or 200 transactions per year as the minimum threshold for collecting sales taxes.
Given these differences, it is best to contact the local state government for the applicable rules regarding nexus.
Tax Remittances Required Under Nexus
If nexus exists, you should take the following steps to ensure that sales taxes are collected and remitted properly:
File with the local state government to do business within the state, which requires a small annual filing fee.
Apply for a state sales tax license. in some cases, you may have to apply for additional sales tax licenses at the local level, in cases where individual cities collect their own sales taxes.
Withhold sales taxes on all sales made within the region.
Remit the sales taxes to the applicable government entity.
Pay personal property taxes on any assets located within the region.
How to Avoid Nexus
The main effect of nexus is that it requires a considerable amount of time by the accounting staff to keep track of tax rates, adjust customer billings, and remit taxes. These activities can add to administrative headcount, so there is general resistance to having nexus applied to a business by yet another taxing authority. Nexus avoidance can include the following:
Limit physical presence. Sales tax nexus is often triggered by having a physical presence in a state. To avoid this, businesses should refrain from owning or leasing property, maintaining inventory, or employing staff in states where they do not wish to establish nexus. Using third-party fulfillment centers strategically can help, as some states consider inventory storage as a nexus-triggering activity.
Use third-party drop shipping. When using drop shipping, businesses can avoid nexus by ensuring that the supplier handles order fulfillment and shipping. If the supplier has nexus in a customer’s state, they may be responsible for collecting and remitting sales tax. Carefully selecting suppliers that do not have nexus in multiple states can help mitigate tax liabilities.
Sell through a marketplace facilitator. Many states require large online marketplaces like Amazon, eBay, or Etsy to collect and remit sales tax on behalf of third-party sellers. By selling exclusively through these platforms, businesses can avoid direct tax collection responsibilities in states where they do not have nexus. However, businesses should still track sales and confirm tax compliance with marketplace policies.
Avoid economic nexus thresholds. Economic nexus laws impose sales tax obligations based on revenue or transaction volume within a state. To stay below these thresholds, businesses can strategically limit sales to specific states or adjust pricing and marketing strategies. Monitoring state-specific rules is essential, as thresholds vary from $100,000 to $500,000 in annual sales or 200 transactions.
Structure business operations strategically. Companies can organize their business structure to avoid triggering nexus, such as operating from a single location or outsourcing certain business functions. Using independent contractors instead of employees in multiple states may reduce nexus exposure, though some states consider contractor relationships when determining nexus. Regularly reviewing business activities and state laws ensures compliance while minimizing tax obligations.