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.
VAT:
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.
