Nice Accounting Adventures: Sales Tax
Having a better understanding of how eCommerce sales tax works could help you alleviate some of the stress normally associated with it.
Sales tax. Just reading the term can trigger some PTSD, right?
And to be fair, it makes sense that reading “sales tax” wouldn’t bring you to a happy place: After all, we have all gone to buy something and thought “oh, this item costs X, I can actually afford it”. And then, as we go to pay for it, turns out it’s actually X + Sales tax.
Ecommerce is, of course, not exempt from sales tax and its woes. But having a better understanding of how sales tax works could help you alleviate some of the stress normally associated with it.
More specifically, if you are engaged in eCommerce within the USA, wouldn’t it be nice to know, once and for all, in which state/states you should be collecting and paying a sales tax?
Well, you’re in luck. There’s a term and process for that: Nexus. With help from our pals, Accountfully, we’re breaking down what you need to know about nexus and how to use it to track and report sales tax below!
What is "Nexus"?
Nexus is a term used to determine how much presence or connections your business has with any particular state in the USA. There are two types of nexus: “physical” nexus, and “economic” nexus:
How Do I Track and Report Sales Tax?
First, you need to be very diligent about keeping track of which states you are selling in, or have a presence of inventory, or have employees. In short: which states do you have nexus with?
Second, you need to find out which of those states have an official economic nexus policy (see map below).
Image Credit: Bloomberg
Then, you should find out the threshold of each state in which you have economic nexus — the nexus rules are different for each state (see map below).
Image Credit: Avalara.com / NOTE: Missouri has approved it, but it only goes into effect on January 1st, 2023
Finally, you should be filing taxes in each and every state you have nexus. You do NOT want the IRS to be the one that discovers your nexus — be proactive and make the first move!
That's it! You're now a sales tax expert... kind of.
See you for part 3 of the Nice Accounting Adventures, where we will be discussing cash flow:
Original lyrics for Frozen. Even Disney thought this would be "too capitalistic."
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