More and more business owners have customers in the US, even if they are based elsewhere. Economic nexus is in short the term used to explain the situation regarding sales tax in each of the 50 US states. It is just the tax triggered by income generating activity in that state. Each of the states has different rules and regulations, so it is imperative that you know where you stand and what your obligations are. Some of the states have a numerical limit (for example if your business has done a certain amount of sales delivered to that state) and some have a financial figure (so for example if you had done over $100,000 of trade delivered to that state). Some states, such as Kansas, require you to (as at the date of publication) declare your earnings and there is no minimum amount.
There are plenty of resources out there to ensure that you are doing the right thing by your business and ensuring that you are abiding to sales tax compliance rules and regulations. It is also important to remember that these figures do change regularly as states change their laws and regulatory advice.
There can also be different figures or guidance depending on the products you sell. For example digital products and Saas (software as a service programmes) have their own category under nexus rules.
The Wayfair Act
A lot of the rules around nexus regulations and the figures that are linked to them have come about after the Wayfair Act came into being after South Dakota v Wayfair (2018). The supreme court of the United States ruled with South Dakota which meant that a regulation which had been in place for a long time and which required a retailer to have a physical presence in the state was superseded. It allowed states to demand that remote sellers collect and post sales tax on their sales within the state. Since this decision, many states (although not quite all of them) and set up new rules which defines what the criteria is to define a tax obligation in the state. This is known as the nexus, but as mentioned before, no two states have the same laws.
It has been hoped that the Wayfair decision will have streamlined and simplified sales tax law in the US, but it is perhaps a little early to confirm this.
It is also important to remember that businesses need to do a “substantial” amount of business before they can be taxed so very small businesses wouldn’t be affected.
The new law also protected retailers from past sales, so retroactive taxes cannot be applied. This would have placed an unfair burden on businesses and this is seen as one of the key points of getting the supreme court on side with the regulations.
It does however negate the advantage that online retailers had of being tax free. This in turn has meant that competition in the retail industry will be widened and hopefully will cause a domino effect across online and bricks and mortar retailers ensuring competition and consistent pricing, which is a benefit for the customer.