Sale Tax Nexus Broken Down- Understanding Nexus

Remove the confusion, mystery and fear around sales tax nexus with experts, Shawheen Amirkhizi and Salim Omar, CPA. Due to their passion in helping small business owners achieve success, they have developed an easy to reference and convenient tool for eCommerce business owners - The Ecommerce Sales Tax Pocket Guide. 

Using their professional experience in the industry and extensive research, the guide has been designed to make it easy for ecommerce business owners to understand the nuances of sales tax at a glance.

"We wanted to simplify this information and bring it to the ecommerce business owner, in a useful way."  Salim Omar, CPA

Who can benefit from the guide?

The guide is relevant to:

• eCommerce businesses who are concerned that they might have a responsibility to pay, collect and remit sales tax. 

• Amazon FBA sellers and anyone utilizing third party fulfilment.

• A business owner selling through multi-channels or typical marketplace facilitators such as sellers on Shopify.

• Big commerce who aren't just selling on Amazon, eBay and Etsy type websites.

Why is Information about Sales Tax Nexus Important for Ecommerce Business Owners to Understand?

The Two Takeaways Business Owners Should be Aware of When it Comes to Sales Tax Nexus

The two takeaways are—

• Physical and economic nexus are not the only types of nexus.

This is a common mistake seen from clients. Business owners often think that physical and economic nexus are only things to consider. There is a third kind as well. 



• People often overlook important nuances that can cause nexus within the physical and economic nexus.

What is Sales Tax Nexus?

According to Amirkhizi, the basic question to ask to determine if you have nexus is:

Is there any connection to or involvement in a state that creates an obligation to collect and remit tax?

Explained further, "Your level of business revenue and if it's substantial enough within a state is what determines whether you need to collect and remit sales tax to that state or not."

A Short History of Sales Tax Nexus

Sales tax itself started in the 1920's. The Supreme Court case that drilled sales tax, was in 1992. In the case of Quill versus North Dakota, the Supreme Court ruled that "a business must have physical presence in the state for the state to require collection of and remittance of sales tax."

This laid the foundation in the early days of ecommerce. It caused a 'wild west of sales tax'. Most ecommerce businesses were not held liable for collecting any type of sales tax. 

In a more recent case, Corp versus North Dakota established the importance of physical Nexus. It laid out the regulations that if you're physically there, you are going to pay sales tax.

With regards to ecommerce businesses:

In addition to the physical nexus, or economic nexus, you have got the affiliate nexus that brings a new pool of people that may need to start paying sales tax.

The next big change came with the ruling from the Supreme Court case South Dakota versus  Waifair in 2018, reversing Quill Corp versus North Dakota. 

Due to this, sales taxes can be levied on remote sellers that are performing over 200 transactions or $100,000 in sales.  This brought economic nexus to a new level of importance.

Taxation on Ecommerce Businesses

Sales tax nexus regulations began before these two cases. It emerged in the form of affiliate Nexus. Amazon used affiliates to generate sales for Amazon.com within different states. The various states were trying to enact laws that would allow them to collect sales tax. They wanted to establish a nexus for Amazon in those states due to the Amazon's affiliates. This was 'a war' with Amazon refusing to have affiliates in some states so they could avoid taxes. Eventually Amazon went to court in conjunction with overstock.com against the state of New York, which Amazon lost. 

This set up 'affiliate nexus'. Affiliate nexus is not widely talked about, but is essential for business owners to be aware of. 

If you have a website, and you're selling on a Shopify store—and you have revenue under the economic nexus threshold, but you have a list of affiliates that are directing traffic to your website, getting paid commission—then you are liable for sales tax.

Things That are Overlooked When Determining Physical and Economic Nexus.

Physical Nexus- What types of questions do you ask? 

• Do you have an office?
• Do you have a warehouse? 
• Are you physically located in the state?

What is often overlooked is:

• Do you have an inventory state? 
• Do you have FBA Inventory in the state? 
• Do you have any third party fulfilment?
• Is there someone who is storing inventory and shipping it for you? 
• Do you have dropship suppliers who are still rotating shipments for you from that state?

Economic Nexus-this is complicated by how states determine economic Nexus.

• Some states look at your taxable sales.
• Many states do include Amazon sales as a factor of your economic Nexus.
• When you're calculating your total taxable sales, in some states, you need to consider that in other states, you also need to consider wholesale sales. Wholesale sales, where you have a tax exempt certificate, will be needed to be added in as well.

Summary of the Nuances of Physical and Economic Sales Tax Nexus

Physical and economic nexus are not the only types of nexus. An eCommerce business needs to consider affiliate nexus. Business owners have to take a holistic look at their business. The important question to ask is, "Is there any activity I have in my business that is going to create a tax liability in any specific state beyond physical and economic?"

Next in the Series: More about Sales Tax 

Learn about product taxability, including topics related to—

• How and when to register for sales tax licence.
• The importance of calculation and collection automation.
• Money saving tips for businesses, how to utilize what's out there, to save you time, effort and expenses.

eSenshi is an accounting firm specializing in assisting eCommerce businesses. We provide a variety of services such as Virtual CFO services, Sales Tax and Accounting Services to assist eCommerce businesses.