We talked about Sales Taxes and how to record them, but sometimes things are a lot more complicated depending on your business. Online retailers in specific are more likely to be blindsided by the fact that they will owe taxes to states they’ve never set foot in due to the existence of a sales tax nexus. So, we will be covering what a sales tax nexus is and how to be aware if you have one.
A Nexus in the context of business implies that the business has a tax presence within a state and thus they have an obligation to pay taxes to the state. Normally, there are two conditions in which you have a nexus within a state: a physical location or an active and substantial presence.
A physical location speaks for itself, but the active and substantial presence is a more complicated topic as online businesses exist within a virtual space. The Supreme Court eventually defined it based on a sales threshold, whereupon if an online retailer makes a certain amount of sales or conducts a certain number of transactions, that state is now considered a sales tax nexus. That means that the online retailer must collect sales tax from the buyers of that state and then remit the sales tax to the state.
Each state has its own threshold definition that may change with time. Arizona has a threshold of $100,000 in sales before the retailer must register for a sales tax permit and then collect and remit the taxes the coming month 30 days after the threshold was met. Georgia, on the other hand, has the same threshold of $100,000 a year but adds another threshold limit of conducting more than 200 transactions in the previous or current year, meaning if you meet either one it will become a nexus. The only way to be certain is to check each state’s Department of Revenue website to figure out.
For a new business, it is relatively difficult to predict whether or not you would need to collect sales tax for any particular state and register for the permit ahead of time. However, do not register in all states for a license before meeting the threshold. Registering creates the nexus itself and makes it mandatory that you remit sales tax even before you have the threshold. That is an unnecessary expense that small businesses do not need.
Instead, track your sales by state and the number of transactions per state through charts and monthly reports, and then compare them to the thresholds established for the states. Once you have determined you have met the requirements, register for the permit. Only after that permit has been approved will you need to begin to collect the sales tax, as doing so before you have a license is illegal.
And that serves as the basics of what you need to know about a Sales Tax Nexus. New business owners and entrepreneurs who operate with merchandise and retailing will need to be aware of these things once their business grows, so use this overview as a foundation to look into it further. And remember that if you require a bookkeeping firm that will gladly handle the processes for you, then don’t hesitate to Contact Us. We’ll help keep your books in the black.
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