What is Sales Tax Nexus?
Sales tax nexus refers to the level of connection between a business and a state that obliges the business to collect and remit sales tax on sales made in that state. The concept is pivotal in identifying when a company is subject to state taxation laws, including sales tax obligations.
Types of Nexus
Nexus can be established through various means:
- Physical Nexus: This occurs when a business has a tangible presence in a state, such as a storefront, office, or warehouse.
- Economic Nexus: Introduced in many states after the Supreme Court's decision in South Dakota v. Wayfair, Inc., this type of nexus is based on the sales volume or number of transactions a business conducts within the state, regardless of physical presence.
- Affiliate Nexus: A business may establish nexus if it has affiliates or partners in a state that help sell its products.
Importance of Nexus
Understanding sales tax nexus is crucial for compliance to avoid costly audits and penalties. Businesses must evaluate their activities in each state to determine whether they meet the nexus thresholds.
As taxation laws vary significantly from one state to another, maintaining awareness of nexus criteria is essential for effective tax planning and adherence to regulations.