Saturday, July 4, 2020

All About Sales Tax Nexus

The world has turned upside down thanks to the COVID-19 pandemic. The pandemic has caused restaurants to close, companies started to file bankruptcy and massive amount of people became unemployed. But people, especially business-minded ones, saw an opportunity and opened online businesses instead. It’s a smart move because selling online can really be profitable.

I used to think that selling online is more profitable because I don’t have to pay taxes and stuff. It turns out that you’ve made a business out of online selling, it’s a must that you register your business and deal with tax obligations.

 If your business operates in a location that imposes sales tax, you are likely familiar with the concept of sales tax. But, are you familiar with sales tax nexus?

What is Sales Tax Nexus

According to an article from Taxjar, sales tax nexus occurswhen your business has some kind of connection to a state. All states have a slightly different definition of nexus, but most of the time states consider that a “physical presence” or “economic connection” creates nexus.
Just to clarify what physical presence is, they can be the following:
  • -          Personnel
  • -          Having an office
  • -          Having a warehouse
  • -          Storing inventory
  • -          Having an affiliate

-        Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair

If you have sales tax nexus in a state, then you must collect sales tax from buyers in that state. In a state’s mind, you, as the merchant, are using their roads and other infrastructure to run your business so you should be helping them out by collecting sales tax from your buyers and remitting it back to the state.

This means you must determine the sales tax rate in that state, plus any local sales tax that might apply. For example, the sales tax rate in Beverly Hills (90210) is 9%. That includes a California state rate of 6.5%, plus a Los Angeles County rate of 1% and a district rate of 1.5%.

So in other words, a state would definitely want to have a lot of merchants selling in their area so they can collect a high number of sales tax nexus; the greater sales tax nexus they collect, that’s more revenue for that state.

Is Vat the same as Sales Tax?

According to an article from Thomson Reuters, Value Added Taxor VAT is collected by all sellers in each stage of the supply chain. Suppliers, manufacturers, distributors and retailers all collect the value added tax on taxable sales. Suppliers, manufacturers, distributors, retailers and end consumers all pay the VAT on their purchases. Businesses must track and document the VAT they pay on purchases in order to receive a credit for the VAT paid on their tax return. VAT is actually popular to consumers because this is what we always see on our receipts including grocery receipts, coffee shop receipts, etc.

What Triggers the Tax Administration Requirement?

Sales tax:

Nexus – Taxpayers with a physical presence in a tax jurisdiction or who meet the economic nexus thresholds.


Permanent Establishment – Existence of a facility, bookkeeping facilities or ability to enter contracts.
Registration Threshold – Taxpayers with business activities that exceed the monetary threshold in a tax jurisdiction.

That’s all I could provide about tax nexus for now. I hope this article has enlightened you even for a small bit. If you need more information, it’s best you consult  your accountant or anyone who specializes in business tax and finances.

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