Did you know that your business may be required to pay tax in states that you don’t have a physical premise in? While in the past businesses were only required to pay tax in states in which they ran physical stores or offices in, times have changed and there are now further factors that business owners have to consider.
Everything you need to know about sales tax nexus:
What is sales tax nexus?
If you’re unsure of what sales tax nexus is. The word nexus refers to the business connections a business has with different states throughout the country. So the term sales tax nexus refers to the sales tax which businesses may be required to pay in specific states, outside the state that they are registered in, which they have a relationship or connection with.
Why more businesses are now required to pay taxes in more than one state:
As shopping in physical stores has declined over the past two decades and online stores have become more and more popular, most states decided to redefine their criteria for what defines a physical presence in their states. In order to be able to gather more revenue from large online businesses which sell products to customers in their state.
A key example of a large business that is required to pay sales taxes in multiple states:
To further illustrate the issue of sales tax nexus, it’s a great idea to take the example of one of the most successful businesses in the world, Amazon. When Amazon was first founded it was only required to pay sales taxes in Washington. The state in which it was first founded and was based in. However, as Amazon quickly grew and opened sales distribution centers in new states, Amazon was then required to pay sales tax in these states. Today Amazon has distribution centers in every state in the United States and as a result, has to pay sales taxes in every state in the country.
South Dakota was the very first state to establish new regulations that state that a company has to pay sales tax in South Dakota if they have an economic presence in the state. In this instance, the state defined that any business would be seen to have an economic presence in the state if they amassed over $100,000 in sales from the State or made over 200 transactions in South Dakota. As state officials estimated that passing such a regulation would increase the state’s funds by approximately $48-$58 million dollars per year.
Why large businesses tried to contest South Dakota’s decision as they believed it would gain traction in other states, the Supreme Court upheld South Dakota’s new sales nexus legislation. As you can probably imagine, other states quickly followed suit in order to increase their annual earnings. While many states followed South Dakota’s lead and only charged taxes to businesses which amassed $100,000 in sales per year or made over 200 transactions, other states came up with their own minimum requirements.
So if you were curious about how sales tax nexus can affect your businesses’ sales tax returns, it’s well worth checking if your business is legally obligated to pay sales tax in numerous states.