The following information applies to the setup of tax settings in the United States only. Nexus refers to a physical presence of your business in a U.S. state. Depending on the varying rules in each state, a Nexus can include offices, employees, property, or independent contractors in the state.
Online sellers are required to collect sales tax from customers if the business has a Nexus in the state where the customer is located and if the sold product is taxable in that state. Each state is allowed to enact its own sales tax legislation.
You always have a sales tax Nexus in your home state, but it can happen that certain business activities create a Nexus in other states too. Reasons for having a Nexus in different states can include:
- A location: an office, warehouse, store or other physical places of business.
- Personnel: an employee, contractor, salesperson, installer or another person working for your business.
- Inventory: most states view storing inventory as a Nexus even if you have no other place of business or personnel.
- Affiliates: someone who advertises your products in exchange for profits creates a Nexus in the affiliate’s state.
- A drop-shipping relationship: depending on the terms of the relationship, having a 3rd party company that ships items to your buyers may create a Nexus.
- Temporary business activities: doing business temporarily in a state (e.g. attending a trade show or a craft fair) can create a Nexus making you liable for sales tax for the entire year.
To understand which tax setting applies to your business, you need to check whether the state where you have a Nexus charges sales tax based on origin or destination.
- Origin-Based: sales are taxed where the seller is located
- Destination-Based: sales are taxed at the location where the buyer takes possession of the item sold.