Sales tax. You’ve heard of it. You’ve probably cursed it.
The reality is it’s here to stay, so it’s important for any online seller to understand as much about it as possible. With that in mind, one of the most important parts to understand is nexus.
What is nexus?
Nexus is basically legal lingo for “presence in a state that requires you to collect and pay sales tax” for sales in that state.
For example, if you live in Dallas, TX and you sell taxable items out of your home then you have a nexus in Texas. That means you are required to collect sales tax from customers you ship to in Texas and pay the state what you collect.
Nexus ain’t what it used to be.
In the old days (like 5 years ago) the previous example was all you needed to know about nexus. Nowadays, nexus is much more complex because of inventory and the speed of delivery.
Huge seller platforms (think Amazon) saw a competitive advantage in faster delivery time on orders. So they began building warehouses all over the country.
Fast forward a bit and we also have more and more states that are cash-strapped looking under every rock for more revenue.
One of the ways states have found this additional revenue is through…you guessed it…nexus! A list of states including Texas, Tennessee, Washington all say that if you have inventory going through Amazon’s fulfillment centers it counts as nexus. So, if you have your inventory sitting in Amazon warehouses in these states, then you’re responsible to collect and file sales taxes or any sales in this state….even if you’ve never stepped foot in the state.
Here's an example:
Let’s say you live in Chicago, Illinois and run your online store through Amazon’s Fulfillment By Amazon program. You send Amazon your inventory and they use their fulfillment centers to ship to your customers. Let’s even go a step further and say you’ve never even been to Pennsylvania, where Amazon keeps your inventory. It doesn’t matter. Pennsylvania considers that nexus. That means you’re required to collect sales tax on taxable items shipped to an address in Pennsylvania. Now you have at least two states in which you are required to collect and pay sales tax. Twice the fun!
As your business grows and as your items get shipped from more fulfillment centers, then the very real possibility exists that you will have to collect and pay sales tax to 5, 6, or even more than a dozen states.
The really bad news is that the more financial trouble states get into, the more likely they are to find ways to ease their nexus requirements and force more online sellers to comply. The really really good news is that services like TaxJar has developed the sales tax expertise to guide you on determining your potential nexus to a state.
How much sales tax should I collect?
Once you’ve determined nexus, then you need to determine how much sales tax to collect. The simplest place to start is to determine if a state is an origin-based tax state or a destination-based tax state.
In an origin-based state, the sales tax rate you charge your customers is based on where you live (for a lot of sellers this is also where your business is based). For example, your business is based in the origin-based state of Tennessee. The tax rate you should be charging your customers is the state rate (presently 7%) plus and applicable local rate (normally 2.25%). A local rate is an extra tax imposed by a country or a city. That means you will charge every customer who buys a taxable item from you and has it shipped to a Tennessee address 9.25% in sales tax.
The opposite is true in destination-based states. And this is where things get more complicated. In this case, the sales tax rate you charge your customers is based on where the item is being shipped to (not where it’s being shipped from).
Last example: your business is based in the destination state of New York, more specifically Rye, New York. You sell a taxable item to a customer who wants their order shipped to their home in Buffalo. According to New York State Sales and Use Tax Rates by Jurisdiction, you are required to collect a total of 8.750% in sales tax. That’s 4% for the state and an additional 4.750% for the local jurisdiction (in this case Erie County).
Unfortunately, destination-based states are more common than origin-based states. The way things are going, you’ll probably be exposed to each type of state as your business grows.
This guest post is brought to you by our partners at TaxJar – a recently-launched online tool built to make sales tax filing easier for online sellers.
TaxJar is committed to not only making sales tax filing easier, but also to help educate online sellers about all of the confusion surrounding sales tax, especially nexus! Stay tuned to the TaxJar Blog for answers to tough sales tax questions.
To sign up for a 30-day free trial of TaxJar, please visit taxjar.com