If you are a business owner then you must have heard about sales tax before. Also, you must be aware of the sales tax nexus. However, do you know what is economic nexus? Not to worry, in today’s we will discuss economic nexus and things you need to know about it. Let us get started with the definition of economic nexus.
What’s Economic Nexus?
The economic nexus or sales tax nexus is generally determined by the economic activity that means the number of sales that you make in your state and the type of economic activity that can trigger the nexus when your sales reach the specified limit.
Every state has its unique and different nexus rules or standard for income tax purposes –so the standard can be lower than one used for the sales or use tax. The number of activities in a state makes the tax return filing and will be defined in state statutes and differs from one state to another.
No matter where your business, warehouses, or employees are there, you need to get the economic nexus. Suppose your sales tax in the state is substantial, then you will have to pay the sales tax there.
Origin-based nexus is very easy. Suppose you’re based in the origin-based state, then you can charge the amount of local and state sales tax at the business’ location efficiently to everybody you ship the taxable products to that state. Thus, your destination will be the warehouse, office, place where the materials are stored, and more.
The destination sales tax is a bit trickier. Suppose you have got the sales tax nexus that is a destination-based state, then it is very important that you calculate your sales tax rate rightly and where the buyer is situated. It means you will have to charge multiple rates of sales tax within one state.
Economic nexus will include:
- Digital presence (like online sales)
- Physical presence (like brick-and-mortar outlets)
Thus, every state sets its own sales tax nexus laws. But, the thresholds for the economic nexus generally differ from one state to another that you need to know. But, most of the states have got the threshold of over $100,000 in sales and 200 transactions annually in that state.
Different Kinds of Nexuses in Online Sales
Many states are using different ways to decide the right nexus for online transactions.
Click-through: The click-through nexus on online sales is the direct link between the seller and the buyer. This type of nexus will happen when the business within a state gets paid a certain commission to refer sales to the seller living out of state, like through a link on the website.
Affiliate nexus: The affiliate nexus generally involves affiliates or independent businesses selling over other businesses. One best example is of Amazon Affiliates program. The affiliate is not the employee or independent contractor, but they have been associated with the business actively, and states are making use of the connection to gather sales taxes. Such kind of a nexus needs some kind of commission for the referrals getting paid by the affiliate.
Thus, economic nexus is one easy way to decide the sales tax nexus. Generally, it is just sales. The business may have got the economic nexus in their state in case they sell more than the specified amount and threshold that is applied.
Calculating nexus is one of the major concern in most of the case, where the seller will need to deal with many different tax rates. The sellers must also consult the individual state about the sales tax rules and know if they’re liable for the sales tax remittances in an economic nexus concept.
Ramifications of the economic nexus for mid and large-sized businesses are related to administrative work and sell over the state lines (like Internet business). But, it isn’t tough when the state offers its sellers with the consolidated administration system. However, it is important to know that it is not always the case – there are a few states that have the disorganized approach of economic sales tax, and want sellers to file it separately with the individual cities & counties.