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Sales Tax Nexus and eCommerce

Sales Tax Nexus is a seemingly complicated concept that has become an online seller’s nightmare. There is very little knowledge, but a whole lot of confusion about Nexus. Sales tax laws and rates vary from state to state. It is the duty of the online seller to collect the appropriate tax from the buyer and deposit it with the state if the seller has Nexus in the state. Are you wondering how to navigate this labyrinth? Follow up as we help you break down the concept of Nexus.

Physical Presence Nexus

Nexus is generally defined as a substantial connection with the state. Having your business entity set up in a state or having physical presence, such as an office location or a store front, inventory or employees, are all examples of a substantial connection with a state.

The 1992 Supreme Court ruling in Quill Corp vs North Dakota (recently overturned) prevented states from imposing a sales tax obligation on online retailers unless they had physical presence in a state. North Dakota’s attempt to collect sales tax on Quill’s online sales of software licenses failed. This legal precedent would apply to all online retailers until the recent Supreme Court ruling in Wayfair vs South Dakota.

Other Types of Nexus

With this basic understanding of physical presence Nexus, let’s look at other types of relationships which can create a sales tax obligation.

In 2008, New York State added the definitions of Click-Through Nexus and Affiliate Nexus to the mix. If you have a referring agent in a state who sends significant sales your way through their referrals, it may create Click-Through or Affiliate Nexus for your business in this state.

Say, you are an online seller of a boutique brand of organic chocolates. You have food bloggers in New York who promote your products and earn a small commission. This relationship creates Click-Through Nexus and, consequently, a sales tax obligation in the state of New York.

Affiliate nexus is similar in concept; however, affiliates are real agents based in the state instead of websites and blogs. As an online business, you need to keep track of your referral agents in every state and the sales generated by them.

Latest Word on Sales Tax – Economic Nexus

With the eCommerce industry thriving, it was only a matter of time until the states would again push for collecting sales tax on online sales. South Dakota led the way in this tax battle, resulting in the landmark Wayfair vs South Dakota case. On June 21st , 2018 the Supreme Court ruled in favor of South Dakota, thus overturning the precedent set by the Quill Corp vs North Dakota judgment. The states were granted freedom to set their own thresholds in determining “economic presence” of a business in a state based on total sales or the number of transactions in that state.

What It Means for Your Online Business

There is still a lot of unknown about Economic Nexus and how each state will go about it. Over 30 states have by now enacted economic nexus sales tax requirements. Some states’ laws are already in effect, while others are to be in effect in the near future.

What this means for you as an online retailer is, unfortunately, more work keeping track of sales and number of transactions by state, determining whether you should register for a sales tax license with additional states, and complying with sales tax filing or reporting requirements.

By | 2018-12-04T18:32:30+00:00 December 4th, 2018|eCommerce|0 Comments