The U.S. has always had some of the most difficult to understand tax codes that change every year to make life more difficult for those who are looking to expand their business beyond a single state or nation. An economic nexus is defined as a basic link in a financial sense between a company and an entity within a certain state by Deloitte. This means each company that is described as having a nexus is responsible for collecting sales taxes in that state and satisfying the taxation requirements of the state government. In an era of global business crossing international and state borders, the nexus laws are some of the most important for states and companies to understand.
The History of Nexus Laws
In the past, states looking to collect taxes were tied to the outdated laws that a company had to have a physical presence within their borders to collect sales taxes. The issues facing online retailers in the 21st-century include the failure of a clearly defined sales tax definition to be in place, which led directly to the insertion of the recent nexus laws.
The American Bar Association explains the history of the Nexus laws that made their way into common use from 2018 onwards dates back to a pre-internet Supreme Court ruling of 1992. The Quill Vs North Dakota case saw the retailer argue they should not pay sales tax in North Dakota because of a lack of physical presence in the state. However, the U.S. Supreme Court ruling stated that by targeting consumers in North Dakota, Quill had sought out sales in the state and should pay sales tax after a certain number of sales had been made.
What is a Nexus?
Although the use of the economic Nexus rules may seem quite straightforward following the Quill Vs North Dakota case, things have become more difficult in the age of internet sales. The nexus rules have been expanded upon by another Supreme Court decision, known as Wayfair Vs South Dakota, according to The Sales Tax Institute.
There are many different reasons why the Wayfair Vs South Dakota decision has become so important, but for many, the idea that online retailers should pay taxes on sales across the U.S. is gaining traction. The Nexus rules were brought into use because the court case brought by Wayfair showed states were losing sales taxes of more than $1 billion each year. The Quill decision had placed the onus on consumers to make sure they paid sales tax on specific goods when they paid their annual taxes, but this was rarely the case.
Foreign Companies and Small Businesses
One of the most difficult parts of the rise of online shopping and retailers is the inability of state governments to tax foreign companies who are shipping their goods into their borders. The idea behind the nexus was to allow states to update their tax codes to reflect the change in economic activity that has been seen in the 21st-century.
In the 20th-century, the U.S. economy was based around manufacturing, the extractions of natural resources, and very few national retail organizations. In the 21st-century, the rise of online shopping gave consumers a great deal of leeway when it comes to choosing to purchase goods from different sellers.
Foreign retailers are now regularly shipping their goods into the U.S. following online sales with state governments struggling to keep up with the ever-increasing flow of goods into their borders. The main concern for State Governments and the Federal Government is the lost tax revenue that is needed to keep states afloat.
How the Nexus is Calculated?
The aim of the economic Nexus is not to punish those small businesses who complete a low number of sales in a state outside their residence. Most state governments understand these retailers are struggling to make ends meet and do not want to punish them with a large amount of sales tax. The most common calculation for the majority of states is to enforce the payment of sales taxes in their state when a company reaches certain thresholds that show a company is making sales in a state on a regular basis.
The Nexus in the majority of the 46 states where it is enforced is the completion of $100,000 in sales or 200 separate transactions. When either of these thresholds is met the state government will begin to search out different ways of receiving their taxation payments to add to the income they receive over the course of the year.
Different states have decided to enforce different thresholds of sales to make sure they are being fair to all small business owners who many feels should not pay sales taxes in every state. Some states have increased the threshold for income that must be met before any sales tax payments are enforced, including Alabama and Mississippi that both require $250,000 in value to be made. Other states simply look for the value of the sales made without considering the number of transactions as a reason to enforce sales taxes.