What Online Sellers Need to Know About Sales Tax Nexus

0:59

So this is going to be the first part of a four-part video that will walk you through step-by-step how to be sales tax compliant. In this video I am going to talk about nexus and what creates nexus for ecommerce sellers. And in the next video, part two, I will walk through the registration process. And part three, I will talk about remitting and filling out tax returns. And part four, I will talk about practice management, and how to make sure you file your taxes on time, how to record that on your books after everything is done.

So before we dive into the nexus, to part one of the Roadmap Made Simple for sales tax for ecommerce clients, please subscribe to our channel and hit the bell button so every time I publish a new video you will be notified.

1:43

Okay, here at LedgerGurus, most of our clients are ecommerce clients, and we have over, I want to say, over 70 clients that we're doing their sales tax for. They range from starting out to 50 million dollar businesses. And we file sales tax returns, sometimes with certain clients we just file in one or two states, and some we file in all the states. So we are an expert in sales tax compliance, especially for ecommerce businesses.

And today I will talk to you about nexus. And always be asking yourself, do I have nexus? Is what Kexin's talking about my scenario? Because if you don't have nexus, you don't have an obligation to collect, to register, to remit sales tax. So, no nexus, no obligation. Once you start having nexus is when you do have an obligation to register with the state first, which we're gonna talk about in part two, and to file and remit sales tax collected, which we'll talk in part three.

2:51 What nexus means and physical presence

Okay, so nexus, what does it mean? It simply means a connection with the state. If you don't have any connection with the state, if you are not utilizing any benefits that the states are providing for you, then you don't have any obligation to register.

So think of it this way. If you have a warehouse in a state and the warehouse gets on fire and the firemen from that local jurisdiction need to come and protect your inventory, and that's why your sales tax going to that local jurisdiction will fund that type of activity.

3:30

But that is an old concept where we say physical nexus. If you have physical inventory in a state, if you have physical employees in a state, that's all physical presence.

When you think about nexus, physical presence should come first. And physical presence, think about two P's, people and property. If you have people in the state, if you have property in a state, including property that are held in a third-party warehouse like Amazon, you have nexus in that state and you have an obligation to collect and remit sales tax to that state.

4:10 Wayfair and economic nexus

But ever since Wayfair decision, which happened almost four years ago, it's so crazy, it was in June of 2018 where the Supreme Court ruled with South Dakota against Wayfair, saying that an online seller, if they have enough economic presence in a state measured by either a level of sales into that state in a calendar year or a number of transactions, usually it's 200 transactions or $100,000 in revenue into a state in a particular period, then you have economic nexus. Then you are actively exploiting the market in that state, which also creates nexus.

5:00

That's what impacts ecommerce business so much. Ecommerce businesses usually don't have that much physical presence in any states, except for Amazon sellers. But if you're only selling on Amazon, please watch this video that I made. It'll answer so much of your question, and you don't need to register in all the states even if you have inventory stored in all the FBA warehouses.

Okay, so if you're not just selling on Amazon, you are multi-channel, you sell on Shopify and Amazon or like another platform, then as a remote seller you don't really have that much physical presence. The nexus that create problems for your business will be through economic nexus, meaning if you're selling a lot of products into a certain state over a certain period of time, then that will create economic nexus for you.

5:56 You owe nothing before the threshold

And like what I said in the beginning, no nexus, no obligation. So all the way before you sell to that threshold, all of those sales, you do not have nexus. You don't have an obligation to collect on those sales. Once you hit the threshold, once you [unclear] that you need to register, then you have an obligation. So on those sales you are going to have to collect sales tax.

So just to summarize, ecommerce business, physical presence, think about property and people. People, employees, contractors, salespeople, traveling agent, all of that are included. And the second one is economic nexus. Think about your sales into each state. If you say, okay, I probably sold over a hundred thousand into a state over the past year, then it's, you probably need to register. You probably already crossed that economic nexus threshold.

7:00 What a nexus study covers and whether to register

So what we like you to do is to do a nexus study, which looks at your economic nexus and your physical presence nexus, to do comprehensive study. And that tells you where you have nexus, when you reach nexus. And on top of that, we also layer in if your product is taxable or not, if the platform you are selling through is collecting tax for you. So we go from your gross sale, like all of your sales, to your taxable sale, to the sales that are your responsibility.

Because if you sell on Amazon and Shopify, the part that you are responsible for is the Shopify piece. So let's say you sell $150,000 into a state, both channels combined, but the majority of your sales are coming from Amazon. You only have $10,000 of that $150,000 coming from Shopify. Then essentially, if the state audits you, then you are only liable for that $10,000 of sale. And if we use an eight percent average rate, so you owe eighty dollars. Is it really worth it to register when you only owe eighty dollars?

8:24

So this is what a nexus study does, is it doesn't stop at saying, okay, you have economic nexus in this state or you have physical nexus in this state. It goes beyond that to say, okay, what about the products that I'm selling, are those taxable? What about the platforms that I'm using, are they collecting on my behalf? So it leads to the exact number that you are responsible for. And then we look at potential penalties and interest to give you a really good guess on how much you would owe if the state comes after you. Then you can base your decision on those clear numbers that you have.

9:04

If you want to be 100% compliant, we definitely support that. But for a lot of our clients, sometimes it just doesn't make sense to remit ten dollars and to pay someone to file a return for you every month to remit ten dollars. Some businesses, they're okay to take the risk of being assessed ten dollars, a hundred dollars, even some are okay with thousands of dollars if they get audited. But some other business owners, they want to be a hundred percent compliant, then they would register in the states where they pass economic and physical nexus.

To see where you are with your risk appetite, but a nexus study will give you the numbers you need to know what your risk exposure is, and it'll help you make the decision.

9:55 Marketplace nexus

Before I jump off, I want to tell you one more thing about nexus, which is marketplace nexus. So lots of people are, if you are starting, if you are opening a marketplace and you're wondering when should I start collecting on behalf of my sellers, I've made a video and I'm gonna link it here so you can go and watch that video and comment if you have any questions about marketplace nexus.

10:27 Checklists, downloads, and the course

Okay, so that's everything basic about nexus. Is focus on physical presence and economic nexus, and do a nexus study. Pull your reports, do a study to see where you are with your sales, if you pass the thresholds or not, and then make a business decision from there. Feel free to comment below if you have any questions, if you want my opinion on what you should do.

Also at the end of this video I want to provide you with some tools. So I'll give you a checklist of all these things that I've talked about. I will also give you a link. If you download our 10 Steps to Make Sure Sales Tax Doesn't Burn Down Your Business, at the end of it is a list with all the states and all of their thresholds and all of the information that you need for economic nexus by state. So that's for sure something you want to download and use that against your own data to determine if you've passed economic nexus or not.

11:37

I hope this has been helpful. We just developed a course, Sales Tax Roadmap Made Simple, for sellers and accountants. I'll leave more information of the course below in the description. Please go check out our course. All of these things that I'm saying, I explain in more details and I give examples, and I actually walk through how to do a nexus analysis step by step, and I give out a nexus analysis template in my course as well. So if you're interested in the course, check it out at ledgergurusuniversity.com and I'll link below as well.

After you click on that link to go to LedgerGurus University, there is a masterclass in there that we actually made it free for a limited amount of time, so you can watch the masterclass and that will answer so much of your questions regarding nexus and whether you should register in certain states or not, depending on your sales activity and the products that you sell.

So thank you so much. Please leave comments below and let me know what your questions are, and I will for sure get back to you. And I hope you guys have a great day. Please remember to subscribe to our channel. I'll see you in part two.