For remote sellers and retailers, it is quite challenging to keep up with today’s sales tax filing. This means you are dealing with a repetitive and time-consuming sales tax return as well as audit work. As a result, you will not get much time for your value-added and strategic activities.
There are some companies who struggle to create plans for different market disruptors, such as changing economic nexus along with the tax regulation. So, how to deal with all these things. Well, let’ discuss these things in detail.
What do you mean by economic nexus?
Speaking about nexus, it refers to all types of requirements for the entities to conduct business in a state and pay and collect tax on income. So, for example, if you offer services to a company located in Los Angeles, you may need to file tax returns in California.
Remember that every state follows its own and unique nexus standards for income tax. On the other hand, this standard may be lower than the standard utilized for tax or sales purposes. Therefore, as per the rule, all retailers should follow nexus laws throughout all the states, not just only the states in which they operate.
Some methods to create nexus
There are some methods that companies can use to create nexus. Let’s discuss the ways following which the businesses can establish the sales tax nexus.
Leases or rentals
The modern economy is quite favorable for leasing and rental companies. One of the significant nexus-creating activities is owing to a property or business in a particular jurisdiction. Why? Well, the leasing or rental company create a physical presence when leasing and renting the items.
When you have a salesperson in another jurisdiction or state, that means you may need to collect sales tax. This is also called “Feet on the ground” requirements. Besides, this is a factor that develops a physical nexus. Every company has a sales threshold with its salespeople. But the requirements are so low that one salesperson can effectively meet them.
Sales growth in new jurisdictions or states
After Supreme Court’s decision in 2018, most of the states that collect sales tax deployed economic nexus. Even though economic nexus will differ from one state to another, it can still create the sales tax return filing obligation for the business. This will depend on the revenue and number of transactions developed from sales between the state and your company.
Remember that the presence of an independent contractor in a state can initiate a nexus in different states. However, the person needs to make sales and offer services on behalf of you. Well, this is a criterion that most companies miss. That means they may deal with huge penalties in the future. For example, in California, any agent, solicitor, or representative, dealing with installing, selling, assembling, or delivering for a company will have to consider the tax nexus.
When your business grows, it is essential to monitor the sales tax nexus for a smooth operation and avoid penalties.