This article explains what the term nexus is, as well as where you need to collect and remit sales and use taxes.
What is nexus?
Nexus is the sufficient connection a business has with a taxing jurisdiction. This connection obligates the business to calculate, collect, report, and remit tax. The connection is established by virtue of the business activity conducted in the taxing jurisdiction. State and local authorities have varying definitions as to what constitutes nexus and who is liable for collecting and remitting sales and use taxes in their jurisdictions.
Contact your accountant, tax attorney, or other qualified sales tax professional to conduct a nexus study for your business. Avalara provides a variety of professional tax services including nexus studies, voluntary disclosure agreements, and tax registration services. For more information about Avalara Professional Services, please contact your GoLive Implementation Consultant.
Typically, a business must have a “substantial physical presence” in a taxing jurisdiction to have nexus there. The following items may constitute a “substantial physical presence” in a taxing jurisdiction, and therefore an obligation to calculate, collect, report, and remit tax:
- A corporate office, storefront or remote sales office.
- Remote employees working from home on company payroll.
- Owned or rented warehouse space containing owned inventory.
- Owned inventory leased to a customer.
- Sales or marketing representatives making regularly scheduled visits.
- Delivery of product by a company owned vehicle.
Rules governing what constitutes nexus vary from jurisdiction to jurisdiction. Determining exactly how a rule applies to your business is critical.
- Transactions in nexus jurisdictions are fully taxable (apart from item and customer taxability concerns).
- Transactions in non-nexus jurisdictions are non-taxable.
Each state defines the rules for when a business is required to collect and remit sales and use tax. Therefore, each state and their tax agencies are the source for the final decision regarding if you need to collect and pay sales tax based on your business practices.
Where to collect and remit sales and use tax
Vendors have plenty of challenges to consider in today’s sales tax realm. Calculation, collection, and remittance of sales and use taxes present administrative burdens, as well as the financial risk of inaccurate or incomplete compliance. An important fundamental question of any sales tax compliance effort is: In what jurisdiction(s) is a business required to collect sales tax?
- If you have any uncertainties as to where you should be collecting and remitting taxes, contact the appropriate state or local tax agencies.
- You can also use the Questions and Answers for Your Tax Advisor to help determine where you need to collect and remit sales and use tax.
It is highly advisable for customers to consult a tax attorney, Avalara Professional Services, accountant, or other qualified tax professional to conduct a nexus study in order to determine nexus in the state(s) in which they wish to conduct business. Rules governing what determines nexus vary from state to state and jurisdiction to jurisdiction.
Examples of nexus jurisdictions
A company with nexus in:
- Washington would select
- United States in Country Jurisdictions
- Washington in State Jurisdictions
- Abbeville, Alabama, would select
- United States in Country Jurisdictions
- Alabama in State Jurisdictions
- Abbeville in Local Jurisdictions for a choice of Manual for For this state, choose how to maintain Optional Local Jurisdictions
- British Columbia would select
- Canada in Country Jurisdictions
- British Columbia in Province Jurisdictions
To add nexus jurisdictions, see add nexus jurisdictions.
Contact Avalara Professional Services, an accountant, a tax attorney, or other qualified tax professional to conduct a nexus jurisdictions analysis for your US-based business. Avalara Professional Services offers nexus jurisdictions analysis only for US-based businesses at this time.
For US-based businesses, AvaTax assumes:
- Transactions in nexus jurisdictions are fully taxable
- Transactions in non-nexus jurisdictions are non-taxable and receive a 0.00% tax calculation
For EU-based businesses, the EU country in which the transaction takes place is only one consideration that AvaTax uses. Other factors considered are the type of good sold, whether that good is taxable or exempt, and whether it is sold to a business or a consumer.
More granular control over taxing transactions is provided by:
Why are there jurisdiction begin and end dates?
Each jurisdiction includes a begin date and an end date. AvaTax compares the document date of ato the two dates of the appropriate jurisdiction. If the document date occurs between the two dates, AvaTax processes the transaction. AvaTax calculates a 0.00% tax for all other transactions.
Change the begin date and/or end date for a jurisdiction to meet your business transaction processing needs.
- If your business is going to establish in a jurisdiction, you can set the begin date to that future date. When AvaTax processes a transaction for that jurisdiction, it calculates tax based on the document date occurring between the two dates.
- Conversely, if your business will no longer have nexus in a jurisdiction, you can set the end date to that future date. When AvaTax processes a transaction for that jurisdiction, it calculates tax based on the document date occurring between the two dates.
- End Date 12/31/2099 will end nexus at 11:59:59 PM on 12/31/2099
For more information, learn how to add nexus jurisdictions.