Worried About Nexus? Here Are 3 Essential Questions You Should Ask
If you’re running a business or working as a bookkeeper trying to figure out sales tax, you’ve probably heard the term “nexus.”
Understanding nexus is important because it can affect your business’s sales tax responsibilities. If your business has nexus in a particular jurisdiction, you may be required to register, collect sales tax, and file sales tax returns there.
Here are three important questions to ask when determining your sales tax responsibilities.
1. Do I Have Nexus?
First, what exactly is nexus?
Simply put, nexus means your business has a significant connection or presence in a jurisdiction that may require you to register and collect sales tax there.
There are two common types of nexus:
Physical Nexus
Physical nexus can occur when your business has a physical presence in a jurisdiction. This could include:
- An office
- A warehouse
- Employees working in the jurisdiction
- Other physical business activities
However, it is important to remember that nexus rules are not the same in every jurisdiction. You should review the tax laws in the jurisdictions where you or your client conducts business to determine what activities may create nexus.
Economic Nexus
Economic nexus can apply when a business reaches a certain level of sales or transactions in a jurisdiction.
For example, a jurisdiction may establish a sales or transaction threshold. Once a business reaches that threshold, it may have a sales tax registration and collection responsibility.
The specific thresholds and requirements vary by jurisdiction, so businesses should review the rules that apply to them.
Once you determine that your business has nexus, the next step is to register with the appropriate taxing authority.
2. Can You Ignore Sales Tax Registration?
The short answer is no.
If your business has a sales tax registration requirement, simply choosing not to register does not make the responsibility go away.
Failing to register and collect sales tax when required can result in problems later, including audits, penalties, and potential tax liabilities.
That is why it is better to identify your nexus obligations and address them as soon as possible rather than waiting for a tax authority to discover the issue.
3. What Do I Do After Registering?
Once you have registered to collect sales tax, the next step is to develop a sales and use tax plan for your business.
Your plan should address important questions such as:
- Which goods or services are taxable? Determine which products or services you sell are subject to sales tax and which may be exempt.
- What documentation is required? Understand what paperwork you need when making sales that are not taxable.
- What tax rates apply? Make sure you are using the current sales tax rates that apply to your products and transactions.
- Who will handle your sales tax returns? Decide whether you will prepare and file your returns yourself or hire someone to help you.
If you choose to handle sales tax yourself or work with a tax professional, make sure the process is affordable and scalable as your business grows.
Why Understanding Nexus Matters
Understanding nexus is an important part of staying on top of your sales tax responsibilities.
For business owners and bookkeepers, knowing where nexus exists can help you identify where registration, collection, and filing requirements may apply.
Nexus rules can vary from one jurisdiction to another, so it is important to pay attention to the specific rules that apply to your business or your client’s business.
Taking the time to understand these requirements can help you avoid unnecessary problems later.
Key Takeaways
When evaluating your sales tax responsibilities, remember these three questions:
- Do I have nexus? Determine whether your business has physical or economic nexus in a jurisdiction.
- Do I need to register? If you have a registration requirement, do not ignore it. Failure to register can lead to audits, penalties, and other tax issues.
- What happens after registration? Establish a sales and use tax plan that addresses taxable products and services, documentation, tax rates, and tax return filing.
Understanding nexus is an important step in keeping your business on track with sales tax compliance.
That’s your tax tip for the week!
Disclaimer: These are general tips. You must learn the rules that are applicable for the jurisdictions where you conduct business.
More Tips in The Sales Tax Sisters Academy
Our mission to provide a resource so business owners, accountants and bookkeepers can understand sales & use tax compliance. We know that sales and use tax laws are not the easiest to understand. Our focus is on empowering you with a framework and general understanding, so you know what questions to ask and where to go to get the information you need to stay on the right side of sales and use tax compliance.
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