What is a nexus study, and does your business need one?

by Sarah Craig September 1, 2021

Whether you are new to the world of sales and use tax or you’re a sales tax veteran, you might have come across this term, nexus study. But what does it mean? We know nexus is Latin, and means to bind, join or tie. In sales tax terms, nexus isn’t quite as friendly. When online sellers see the word “nexus” all they can often think about is “sales tax nexus” which occurs when your business has some kind of connection to a state. All states have a slightly different definition of nexus, but most of the time states consider that a “physical presence” or “economic connection” creates nexus. If you have nexus in a state, you are required to register with the state and collect sales tax from your customers.

So with that in mind, what is a nexus study? And what’s the purpose? Lastly —  does your business need one? 

What is nexus? 

Let’s start with getting an understanding of nexus. 

As we mentioned above, sales tax nexus occurs when your business has some kind of connection to a state. Forty-six states and Washington D.C. all have a sales tax. But every state is different – the exact laws that create sales tax nexus in one state may be a little different in another. You can find what defines sales tax nexus in your state here. In general, states consider that a “physical presence” or “economic connection” creates nexus. You only have to charge sales tax in the states in which you have sales tax nexus, which might not all forty-six states. That’s why it’s crucial to understanding nexus laws in the states where you do business

Business activities that create sales tax nexus include:

  • Having an office, store or other location in a state (even a home office)
  • Having an employee, salesperson, contractor, etc. in a state
  • Owning a warehouse or storage facility in a state
  • Storing inventory in a state (such as in an Amazon FBA warehouses or other 3rd party fulfillment center)
  • Having a 3rd party affiliate in a state
  • Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair

Economic nexus – Making a certain amount of sales in a state (either a certain dollar amount or a certain number of transactions)

If you suspect you might have sales tax nexus in a state, you could check with that state’s taxing authority to determine whether or not you have sales tax nexus and are required to pay sales tax in that state or taxing jurisdiction. A CPA or sales tax expert can also assist you in determining where you have nexus, often with a nexus study. Which leads us to…

What is a nexus study? 

A nexus study reviews all your business activities and sales in a state or multiple states and determines if these activities create sales tax nexus. Conducting a nexus study is often the first step to becoming sales tax compliant, as it tells a company in which states they are obligated to collect, file, and remit sales tax in accordance with that states sales tax laws.

TaxJar can help you determine where you have nexus. TaxJar’s Economic Insights Tool is a good starting point to determine where you have economic nexus. You can also have an in-house finance person or an outside sales tax expert perform this study.

Once you determine where you have sales tax nexus and for how long you’ve had nexus in the state, you can begin the process of becoming sales tax compliant. 

I have sales tax nexus in a state that I wasn’t aware of — what now? 

The next step is to determine how much sales tax you should have collected from your buyers in your nexus states, beginning from when you first had sales tax nexus. 

Once you’ve determined how to deal with past due sales tax liability, then it’s time to register for a sales tax permit and begin collecting sales tax from buyers in the state. It’s unlawful to collect sales tax without a sales tax permit. Here’s more on how to register for a sales tax permit in every state.

If you are lucky, you may have caught your nexus obligations early. In this case, it might be worth it to you to simply cut the stake a check for the sales tax you missed out on collecting.

However, in many cases, the amount of past due sales tax begins to add up to a significant sum. If this is the case, you have the option of working with a sales tax expert to file a voluntary disclosure agreement (VDA)

With a VDA, a sales tax pro negotiates with the state on your behalf. In exchange for getting your business registered to collect sales tax going forward, they can often negotiate down the amount of sales tax owed, and/or penalties and other fees. This is often the best way to go when you realize you owe a large amount in back sales tax.

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