Thousands of businesses across the country have started switching to an online model. This model has made it easier for them to work with customers across the country and around the world. It has also reduced payments on rent and physical locations that many businesses previously struggled with. But this model has a new set of challenges that companies have to deal with. One of these is the newly relevant question of nexus in an online business world. Companies need to become familiar with the regularly arcane world of nexus and tax status. Familiarity with nexus-related tax laws is essential to navigating government regulations in the age of e-commerce.
What is a nexus?
Economic nexus is a term used to describe the status of a company for the purposes of paying taxes. Nexus is basically the technical term for a connection. A physical nexus means that a company has a brick-and-mortar location within a state or jurisdiction. This location is the jurisdiction where a company pays income taxes. The rise of online commerce means that the traditional idea of a nexus for business has to be changed.
Now, the more relevant term is economic nexus. This term refers to the state or municipality where an online business is based. The idea slightly changes the traditional operation of nexus-related tax laws because of the unique nature of online commerce. In traditional commerce, it was assumed that a company would require a significant volume of transactions in order to stay in business and pay for rent. But e-commerce is significantly different.
Individuals who are simply selling a few old items out of their closet are not a business and do not have to pay sales tax. Therefore, the legal definition of economic nexus includes a number of specific parameters and sales minimums. Individuals often have to make thousands of dollars per year and hundreds of transactions to meet the requirement of having to pay sales tax.
Why is it important?
The idea of nexus is important because it is essential to the operations of state and local governments. For many years, online companies were not required to pay sales tax. They were not technically licensed in specific states and saw no incentive to pay sales tax when they did not absolutely have to. This status is one of the main reasons why Amazon and eBay are now two of the largest companies in the world.
Perhaps the biggest drawback of this approach is the damage that it did to a number of different entities. Companies with brick and mortar locations in many areas simply could not compete. The online companies would always have a price advantage because they did not have to pay the extra money for sales tax. In addition, governments missed out on potential revenue from the lost tax money.
This loss of revenue meant a loss for schools, roads, and a number of other services that depended on tax moneys. As a result, a large number of states started passing laws that basically treated large online businesses like traditional businesses for tax purposes. They started to enforce those laws and saw a considerable increase in the amount of sales tax money flowing into their states. This process has only intensified in recent years as more and more companies go online.
What to do?
The most important step to take when one is looking into doing business online is to look up nexus requirements in a particular state. Every state has different guidelines for determining nexus and the steps that a company must take once it meets the nexus threshold. There is no documentation from the state or warning that a company is about to meet the nexus threshold and should act.
In fact, most states give a company 60 days to register and meet the nexus requirements once they meet the threshold. Missing those requirements could result in significant fines and action taken against a company. Once the company has learned about the requirements, they should determine whether or not they will meet those requirements within the next year. If they will, the company should start planning on how to collect and pay sales tax. Companies should at least consider enlisting the help of a licensed tax professional who will collect and process these payments.
Any online company that is starting to deal with a significant volume of transactions needs to take care and ensure that they are following all nexus-related tax laws. They need to learn what taxes they owe and pay those taxes in a timely manner. Companies also need to make sure that they are keeping the right kinds of records in case of an audit. These efforts will greatly aid any company that is worried about their status as an online business entity and the complicated impact of nexus-related tax laws.