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Growing your business is a critical goal for many entrepreneurs. But the process can be complex and confusing, especially if it involves a nexus. The Sales Tax Institute defines the sales tax nexus as “the level of connection between a tax jurisdiction as a state and an entity such as your company. Until that connection is established, the tax jurisdiction cannot impose your sales taxes on you “.
Prior to 2018, a company needed a physical presence in a state for there to be a nexus. So, for example, if your business was in California but you had a warehouse in Indiana, you would have to collect sales tax from customers in both states.
But the Supreme Court ruling in the South Dakota v. Wayfair case in 2018 changed the way out-of-state companies collect and remit sales taxes. The ruling lets each state determine the nexus and no longer needs a physical presence. Most states now require remote retailers with more than 200 transactions or $ 100,000 in sales in the state to collect and remit sales taxes in the state where the goods are purchased and delivered.
Almost all states have enacted nexus laws that affect distance sellers. The percentage of sales tax varies by state and often by municipality, and each state has its own rules, registration processes, and tax collection agencies. When a remote vendor or market facilitator (see common terms below) crosses the nexus threshold, the company must obtain a vendor permit and register to remit the state sales tax to every taxable purchase.
Related: Do you know the sales tax rules of your supply chain states? If not, it could be expensive.
Common terms of the nexus
Although the terminology varies from state to state, it is important to know the following terms:
- Distance seller: A person or company that has no physical presence in a state, selling and shipping products to consumers in that state.
- Market facilitator: A company, such as Amazon, eBay and Etsy, that sells goods and services on behalf of third-party sellers. The facilitator hires market vendors to help sell their products through a physical or electronic marketplace.
- Market seller: A person or company that sells through physical or electronic markets managed by a market facilitator. Market sellers do not need to levy transaction taxes when a market facilitator collects and remits sales tax for them.
- Voluntary disclosure: Each state also has its own process for unregistered remote retailers to self-disclose and pay unpaid or previously unpaid tax obligations (with no penalties in most cases). The self-disclosure period is usually three to four years, and the penalties are high for not paying the sales tax to be paid.
- Simplified sales tax system: This allows remote sellers from 24 simplified member states to submit an application to collect and remit sales and use taxes. Distance sellers can register in each individual state or in the 24 member states. Check with market vendors and market facilitators for more information on registration.
Sales and use tax. While many states use the words “sales and use tax” as a term, taxes are really different.
- Sales tax is a percentage set by the status of sales of taxable goods that are passed on to the customer at the time of sale. Customers pay sales tax on applicable purchases, but the business owner must collect and remit sales tax to the appropriate agency.
- Usage tax is a percentage of taxable goods that are not collected from the customer at the time of purchase. Instead, it is the customer’s responsibility to remit the tax to the appropriate state agency. When the use tax has to be paid, companies must inform their customers of their obligation to pay the tax.
- Local or municipal taxes. Most states have additional local (city or county) sales tax regulations. The state determines what the highest additional tax may be and the city or county decides what to charge.
Related: How to manage multistate tax planning as a small business owner
How to register for sales tax
Most states collect sales taxes through their state revenue departments. Remote vendors obtain a vendor permit and then set up a business account on the state’s tax remittance portal. Remote vendors and market facilitators can set them up directly or through a third party.
In addition, in most cases, sales taxes are remitted monthly and paid directly through the online portal.
Nexus for payroll
Hiring workers in another state establishes a different type of nexus: income nexus or payroll. If a company has an employee working in another state, it must register to pay payroll taxes in that state.
It can become complex. For example, if you have employees (even part-time) in Connecticut, your company must register with the Connecticut Department of Tax Services, the Connecticut Department of Labor (Tax Division) and the Connecticut agency. paid Connecticut permits. Employers are required to withhold federal taxes even in states without income tax.
Some states have reciprocal agreements where taxpayers living in one state and working in another may be exempt from paying taxes in both states. Because paying payroll taxes in several states can be overwhelming, many small business owners use a third party to help with registration and a payroll service to manage payments.
Since the Supreme Court decision in 2018, most states have enacted new nexus laws. In many states, non-compliance is considered a felony. In others, it is a misdemeanor. And because regulations vary from state to state, it’s imperative that you learn what the laws are in each state.