An online business owner shared that she was told that she has nexus and must register her small internet business everywhere she ships product. She shared that she generates approximately $30,000 per year. She operates out of her home, has no employees or agents in other states, and uses a common carrier to ship goods. She shared where she ships product. She is NOT required to register everywhere she ships goods.
Nexus and Your Business: Economic Nexus
States now have the power to require companies to register to collect use tax even if the company has no physical presence in the state due to the passage of the Wayfair case. That’s right, you may be required to register to collect use tax from your customers, even if you have no physical presence, i.e. employees, representatives, independent contractors working on your behalf, property, inventory, or equipment in a state. That is a BIG shift.
The business owner I mentioned was not required to register because she did not have enough activity in the states into which she shipped product to trigger a registration requirement.
You must refer to the rules of the state into which you ship goods to determine if you have enough activity to trigger a registration requirement. Economic nexus is a part of the analysis needed to determine if you are required to register to collect sales and use tax. Economic nexus rules apply when you have no physical presence in the state. The triggers are the dollar value of the sales to clients in the jurisdiction, the number of transactions with customers in the jurisdiction, one or the other, or both. Thresholds and the manner in which they are calculated vary by jurisdiction.
Nexus and Your Business: Physical Nexus
What does Wayfair mean for people who have physical presence in a state? Nothing! If you have a registration requirement in a state due to physical presence or because you met the definition of “doing business in a state,” etc., your duty to register is unchanged. You had a duty to register before the Wayfair case.
General Rule of Thumb: Your company has physical presence if you have employees- including employees that work at home, agents, salesmen, company trucks, inventory etc. in a state. Refer to the rules governing this area in each jurisdiction to determine if you have an obligation to register to do business, collect sales tax, etc. in the state. Rules vary and change.
Nexus and Your Business: Does it Matter if You Trigger Economic or Physical Nexus
No, in a general sense, it doesn’t matter if you have physical or economic nexus for purposes of registering to collect use tax from your customers. If your company is required to register, you have a responsibility to understand taxability rules and comply with them. Some rules do vary based on why you were required to register to collect use tax.
Some states simplify rules for remote sellers, i.e. taxpayers with no physical presence in the state. Rules vary by jurisdiction. However, there is one BIG difference. Remote sellers (companies with no physical nexus) may not be required to register with the Secretary of State to do business. Refer to the rules of each jurisdiction.
NOTE: There may be reasons that registration with the Secretary of State is advisable, even if not required. If this is an issue, speak with your business advisor.
Growth is a great thing! Your responsibility to plan for it has been heightened. You must know what constitutes physical nexus in each jurisdiction. You must proactively measure the economic thresholds imposed by pertinent states when measuring whether your level of activity in a state triggers a registration requirement. States legislate when to perform the nexus analysis, how to measure activity, and deadlines once the registration requirement has been met. Plan responsibly and enjoy the fruits of your labors.
For more information, visit 5 Nexus Tips! Cliff Notes for Beginners.
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