From Thresholds to Nightmares: Decoding Economic Nexus in the US waters
Nexus or shall we call it perplex-us?
- A businessman’s worst nightmare and a taxman’s favourite riddle.
As Indian businesses, we aim to capture selling overseas, to the USA, but there are layered intricacies fraught in this transaction. The most prominent obligation for a seller is to figure out whether they have an economic nexus in the jurisdiction they are selling to. Identifying nexus is like finding a needle in a haystack and it is easy to get confused without expert help. Missing compliances can land you in a soup of penalties and fines. In this write-up, we will understand how to figure out whether a nexus exists or not, and if yes, how do we determine it.
As kids (or also adults) we all played ‘Where’s Wally?’ Economic nexus is like a digital (and less fun) version of that game.
Let’s start elementary: What exactly is ‘nexus’?
Nexus, is a derivation of a Latin word, which means to join or bind. In taxation, nexus connotes a connection of a business (be it physical or otherwise) to a jurisdiction that triggers its tax obligations. In a nutshell, sellers must have a presence in a state before its tax officials require the seller to collect sales tax from buyers in that state.
Who gets caught in the economic nexus web?
Historically, only the sellers with a physically identifiable presence were the victims of the economic nexus, however, post the South Dakota vs. Wayfair Inc. ruling, even remote sellers with no physical footprint are also caught up in this perplex-us nexus web.
The legal premise of the post- Wayfair era:
The ruling, in South Dakota v. Wayfair Inc., was a victory for brick-and-mortar stores, which had complained they were disadvantaged by having to collect sales taxes while many online competitors did not. Since the court’s ruling, many US states have enacted laws requiring sellers to collect and remit sales tax on digital products and services sold, even if they have no physical presence in the state. Hence, now:
Economic nexus = Physical and/or Online (presence)
Steps to track your economic nexus footprint in the US:
1. Map your jurisdictions
Every state in the US plays a different deck of cards when it comes to sales and use tax. They don’t fancy a uniform rate or law
Interesting facts:
To enunciate the disparity between different states, look at the following examples:
- North Carolina likes to tax the sale of e-delivered greeting cards
- North Dakota – It has chalked down a list of digital products and then specifically exempted them from taxation
- Texas – Has defined "taxable items" as including tangible personal property in electronic form instead of in physical form
In the US, the taxation regime and understanding are complex. It is advisable to also check the Streamlined Sales and Use Tax Agreement (SSUTA) that aims to minimize fundamental differences between taxation styles of different jurisdictions and states in the US. The Agreement focuses to simplify sales and use tax administration in order to substantially reduce the burden of tax compliance. If you plan to transact overseas with the US, you must check whether the state you’re going to transact with, falls under the SSUTA.
2. Twig your thresholds
As a seller, you must figure out the nexus laws of the country, where you make sales. All US jurisdictions have different level playing fields for the laws of nexus. Economic nexus is actuated by fulfilling a specific level of sales (say, $100,000) and/or a certain number of sales transactions (say, 200 transactions) in another state. These thresholds can vary by state and can include factors such as sales revenue, transaction volume, or the number of transactions.
Here, you can find a comprehensive guide of sales tax guide for nexus
A quick snapshot to depict the complex and dynamic nexus threshold statistics in the US:
Economic nexus thresholds
3. Sum up your sales:
Next, you must calculate your sales in each state to determine if you have exceeded the economic nexus thresholds. This will help you determine whether or not you have a tax obligation in that state. You must determine the time frame for your sales calculation, typically a calendar year or a rolling 12-month period. Next, gather sales data for each state, including gross sales, taxable sales, and nontaxable sales. Finally, you must map the total sales made in each state to the economic nexus threshold for that state. If your total calculated sales amount exceeds the threshold, you have an economic nexus in that state. Presto!
Additionally, it is advisable to monitor and keep informed on the changing laws and thresholds across the country. Not knowing about a specific law is not an excuse. Stay leakage-proof aware and keep your ducks counted. Determination of economic nexus is a tricky craft and getting some external help and guidance is essentially a stride towards better tax preparedness. With automated software like Avalara, you can also evaluate your nexus for free- This assessment provides an estimate of where your business may have triggered economic nexus.
Let’s spot the nexus, stay compliant and keep growing!
