Great question, and you’re not the first person to ask! If we only had a penny!
Well, the easy answer would be…because governments have tax laws which prompt us to pay taxes! Again, you would ask why those laws are even there to begin with.
To understand that, you need to know what tax revenue is. We really don’t want to bore you with details, so we’ll have an “in a nutshell” approach to this question:
In a nutshell (!), a government’s income is called tax revenue. And where do governments get that income? From taxes, obviously! Whether through income, use, value-added, sales, or any sort of tax, the government gets the money it needs to sustain various organizations, such as public schools, police departments, social services, etc. General sales tax is a big part of that.
While all of this sounds pretty simple in theory, there’s a lot more to general sales tax than meets the eye. Like we said, each state has different ways of calculating its tax rate, with some being really high, and some being very low, to none at all.
Then there’s the regulations per state, and how local governments treat those regulations. In fact, it is exactly the intricate nature of tax, any type of tax, that confuses a lot of people, sellers and buyers alike. Luckily, there are tax professionals out there like our pros at Prestige Auditors, who can assist you with these regulations and show you one or two loopholes while we’re at it!
Yes, we know, that’s a pretty worrisome title. But, no worries!
We’ll start off with what a nexus is, and why it’s closely connected with taxes.
Let’s say you’re a business owner and your business is called XYZ and it’s located in the District of Columbia. The connection your business has with a taxing authority (in this case, the District of Columbia as a state) is defined as a nexus. Basically, if you don’t have a nexus, a taxing authority cannot impose its tax laws on your business.
There are different types of nexus, and you guessed, sales tax nexus is one of them.
Back in the good old days, a sales tax nexus would be determined by:
- The physical location of a business in a state
- The business having employees working for it in a state
- Possessing tangible property in a state
- Having sales reps in a state
But we’re not in the old days anymore, are we? The advent of online businesses meant more businesses that don’t really have a physical presence in a state, which in its turn meant little tweaks in the law to address the sales tax nexus concerning online businesses. Two years ago, the Supreme Court decided that the laws of the good old days didn’t work as well in the better new days, and as a result, allowed states the right to ask online sellers without a physical presence to charge and collect sales tax from whoever ends up buying their products.
Obviously, smaller online businesses, such as family-run businesses, would see harm as a result. And this is why many states came up with the idea of thresholds. A threshold is a minimum number of financial transactions or sales a business needs to have in order for the state to impose its sales tax regulations on said business. If the total annual transaction is less than that minimum, the state will not charge sales tax for that business.
Like we said, each state (unless that state has no sales tax) has set a minimum number of yearly transactions for online business, below which no sales tax will be charged. If as a business, you pass that minimum, you will have what we call a “nexus trigger,” meaning that you will be required by law to collect, file, and report taxes on the products or services which you sell, as well income tax on your total revenue.
Now, why is this important? Because failing to do so means getting hit with heavy state fines which could be damaging to your business. These state fines may take 10% of your total revenue.
In the case of online sellers selling through third-party marketplace facilitators like Amazon or Walmart, this can be very problematic. When you sell your products on these marketplaces, you really have no control over which states they go to, and you might be unaware of the states in which you’ve triggered a nexus requirement. In the case of Amazon, for example, your inventory will be stored in states where Amazon has warehouses, and this may trigger a nexus which you might not even realize. How can you file taxes if you’re unaware of the fact that you have to? This means that those state fines will hit your business and damage your total revenue.
Yes, the solution lies in conducting what is known as a sales tax analysis. And this is exactly what we at Prestige Auditors are here to offer your business. What we will do, is go through your business, run a sales tax analysis, and figure out the states in which you have had nexus triggers.
Once we figure out the states where you’ve activated nexus triggers and have to deal with sales tax in, we’ll move on to phase two of the master plan: getting you tax exempt in those states, meaning saving you from extra sales tax! This is the end goal of sales tax analysis! Keeping you safe from state fines, and helping you avoid paying extra sales tax. You can do it legally, and you should!