It is hard for business owners to follow sales tax regulations in the US because the rules are complicated and may change over time and further so for those operating in different states. There is a term in law known as “nexus,” meaning the amount of connection a business must have with a state before it has sales tax responsibilities there.

Failure to follow nexus laws by American entrepreneurs may cause heavy fines, extra scrutiny from the IRS, and many compliance issues. A California sales tax attorney or a lawyer from another state can navigate on behalf of the client for the sales tax and can reduce the tax bill.

This article explains the role of nexus in multi-state tax requirements, what can start nexus, and how to manage it ahead of time.

·        Role of Nexus in the Sales Tax

When talking about US sales tax law, nexus indicates the legal relationship between a business and a state that obliges the business to gather and send sales tax from recorded sales in that particular state. The Supreme Court decided the case of South Dakota v. The way Wayfair, Inc. changed things was by including economic activities in what defines nexus, not only physical presence.

What makes this important? Since not all states share the same nexus rules (most states do not), it is up to each state to establish its own rules. If you do not realize where your business has nexus, you might be avoiding paying taxes, which can lead to audits, extra interest, and charges.

·        Physical vs. Economic Nexus: Things Triggers Sales Tax Liability

Before, physical nexus meant a business had an office, employees working there, inventory, or property in a specific state. If any of the conditions applied, the business needed to become registered and collect sales tax in that state.

Yet, the move to e-commerce caused the economic nexus standard to appear. If economic nexus is used, a company must collect sales tax in a state even without a physical location, as long as it passes certain sales or transaction numbers—usually $100,000 or 200 transactions each year.

Since every state decides its own economic nexus rules, businesses must be certain to track where their sales happen thoroughly.

·        Common Nexus Trigges Entrepreneurs Overlook

Many business activities, aside from income and assets, can cause a business to have a nexus. These include:

• Being present at trade shows
• Partnering with outsourcing companies
• Warehouse systems (including Amazon FBA) are used for inventory storage
• People working from different states using remote access

Doing these activities without extra care may mean your business has tax obligations across various states.

·        Multi-State Sales: How IRS and States

Sales tax is actually managed by each state, not by the IRS. If state sales tax is not followed, the results can include trouble from the IRS, as they can access the shared state information and start an audit of income and employment tax. Here comes the IRS audit attorney from Los Angeles or another state who can conduct an internal audit and help the clients resolve the tax issues. States team up with other countries and use data analysis to find cases where law enforcement is not abided by. Being caught evading sales tax in one state could result in problems across multiple states, making businesses face many audits and issues.