Do you have tax liabilities in another states or countries and not even know it? Nexus is a term that you might have heard but you aren't really sure what it is. Most small businesses don't think about it because it must be something only bigger businesses deal with but states and other countries are getting smarter.
Merriam-Webster defines nexus as a connection between two things. For tax purposes, that connection creates a tax liability. How does a business create a connection for tax purposes?
Under traditional rules, there were three ways to generate nexus in a state:
With the popularity of online shopping and states losing out on sales tax money from those internet sales, states started to redefine how nexus was created. Many states have passed "Amazon" or "Click-through" nexus laws, stating that online affiliates can now generate nexus.
There are even a few states that have passed laws stating that if you advertise regularly in a state, you have nexus in that state (CA and TX are two of those states).
Most states also have a threshold amount you must cross if you do not have physical presence in a state. You should check with each state you are interested in doing business in.
Generating presence in the EU is a bit easier and harder at the same time. Essentially, a business must sell physical or digital goods in EU countries. Once a business hits the threshold in one EU country, that business now has nexus in the entire EU.
The lowest threshhold, which is what many countries use, is 35,000 Euros (equivalent to about $43,000).
It completely depends on the state or country.
Some states tax only physical products, while others go so far as to take digital products. It's important to look at each state separately.
In Europe, digital goods are subject to VAT and the rates in many countries are above 20%.
The current case about nexus is Quill v. North Dakota a new case in front of the supreme court is South Dakota v. Wayfair can change the rules about nexus.
This is an issue for a lot of the services we use online. Some of the largest providers do not have an option to collect sales or VAT taxes. Some of these services are working on it.
It's important that we, as concerned users, ask these questions. If we don't ask, the developers aren't going to take the time to change the software.
Start by looking at where you might have nexus because of physical presence due to employees, assets, and outside salespeople or installers.
Next, if you have affiliates, generate a report of your sales by affiliate to determine which states you should research. Once you have that list, you can sort by largest amount of sales and start researching those states first. If you have international sales, you will also need to see what the thresholds are for those countries to determine if you have nexus outside the U.S.
First, I would talk to your CPA. If your CPA is not knowledgeable about nexus issues, find a consultant who is. If you need help with this, feel free to email [email protected] to book an appointment to discuss if you have nexus issues.
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