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Taxes are complicated, which is why we’re thrilled to have our friends over at TaxJar as regular contributors. Each week, they break down the need-to-know tax information for small-business owners.
Today, TaxJar founder and CEO Mark Faggiano gives us a crash course in sales tax nexus. Read on to find out what exactly it is and how exactly it affects you. (Remember, these tips are for informational purposes only. You should always consult a tax professional for specific tax guidance.)
Nexus is a Latin word meaning to bind, join, or tie. Since its ancient origin, it has evolved to refer to any connected series or group. Beautiful concept, right? Unless you’re a product seller in the U.S.
If that’s the case, then when you think nexus, you probably immediately think sales tax nexus. That means figuring out when and to whom to charge sales tax, what kind of documentation you need, and how on earth to remit all that sales tax you collected back to your state.
We explained the entire sales tax process here. Now we’ll focus in on the concept of sales tax nexus and help you, as someone who sells tangible goods, determine when and where you need to deal with sales tax in general.
Sales tax nexus: the basics
Sales tax nexus occurs for you when your business has some kind of relationship to a state. While each state’s definition of sales tax nexus varies slightly, most agree that if you have a significant presence in a state, then you have nexus there.
Ask yourself these questions to determine whether you have sales tax nexus in a specific state:
In which states do I have:
- An office?
- A store or other physical location?
- An employee or employees?
- Products stored in a warehouse or other venue?
- Presence at a trade show, craft fair, or other physical location at any time?
- An affiliate?
After asking yourself these questions, you’ll have a list of one or more states in which you will more than likely have sales tax nexus. If you have any questions about nexus, you should contact your state’s revenue department.
So I have sales tax nexus. Now what?
If you have sales tax nexus in a state, that means you have to charge sales tax to your customers in that state. Do this by determining the sales tax rate in a state and any local rates that may 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%. Sales tax rates will vary from locality to locality.
Check with your state’s taxing authority to find your sales tax rate, or simply use TaxJar’s handy Sales Tax Calculator. Or just go to www.taxjar.com/mobile on your device to find out the sales tax at your current location. This is handy if you aren’t in your usual business location but want to make a sale on the spot.
Also remember that sales tax is multichannel. What do we mean? Say you sell your products at craft fairs and on Etsy. If you live in and/or operate your business in Texas but also cross over to Louisiana to sell at a weekend craft fair, then you have nexus in both states. Not only should you set your Square Point of Sale to collect sales tax from buyers in Texas and Louisiana, but you should also collect sales tax from buyers in both Texas and Louisiana through Etsy.
Sales tax nexus controversy
The topic of sales tax nexus can get contentious. Even though every state’s department of revenue spells out what constitutes sales tax nexus, some people argue that small businesses should only collect sales tax in their home states. Some of the arguments we’ve heard include:
- If you don’t have a physical presence in a state, then you don’t have sales tax nexus.
- If you don’t do much business in a state, it’ll never know you should have collected sales tax.
- If you don’t live in a state, its laws don’t apply to you.
But like we said, states are fairly explicit about what constitutes nexus. In the view of state lawmakers, if you do any kind of business in their state — even just storing goods in a warehouse — you’re using or potentially using that state’s resources (roads, police, fire fighters, etc.) and should pay tax to help maintain the state.
Ultimately it’s up to you to determine whether you have sales tax nexus in a state and whether you comply with state sales tax laws. Not complying may save you some money and headache — or it could result in a sales tax audit, fines, or penalties.
Sales tax nexus: the takeaway
If you have a significant presence in a state, then you have sales tax nexus and should charge sales tax to your point-of-sale customers in that state and for items shipped to that state. Don’t forget to charge sales tax on all the platforms on which you sell. Now that you’ve determined that you have nexus, [read up on your other steps to sales tax compliance](https://squareup.com/townsquare/january-sales-tax-a-step-by-step-guide/).
Sales tax is complex. That’s why we created TaxJar — to handle the burden of sales tax while you get back to running your business. TaxJar pulls in sales tax collected from all the channels where you sell, compiles your data into return-ready reports, and will even AutoFile your sales tax returns for you in 26 states (and counting). Sign up for a 30-day TaxJar free trial today and put a lid on sales tax. And check out Square App Marketplace for more information on how to link your Square account to TaxJar’s tools.*