What are the Economic Nexus Laws?
Economic nexus laws are state laws that require out-of-state businesses to register, collect, and remit sales tax on taxable sales made to customers within the state, even if the business does not have a physical presence in the state.
These laws are based on the economic activity of the business, such as the number of sales made or the number of transactions completed within the state.
Economic nexus laws were established as a way for states to capture revenue from remote sales, which have grown significantly in recent years. These laws vary by state and can include a threshold for the number of sales or transactions made within the state before a business is required to register.
For example, a state may require businesses to register if they make more than $100,000 in annual sales or complete more than 200 transactions within the state.
Knowing when to register is important to avoid penalties and protect your brand and profits.
Even as a non-resident of the U.S., you can register for sales tax by working with a partner firm that can handle all your sales tax registration and remittance needs. They can also assist you in calculating the economic threshold that you cross in each state.
Keep in mind it’s illegal to collect taxes without a permit and could be considered tax fraud. As a Shopify seller, you can check your sales tax liability dashboard, which will help you know if you have crossed the economic thresholds in any state.
What Are The Implications Of Economic Nexus Laws?
For entrepreneurs, understanding and complying with economic nexus requirements can be critical for avoiding costly fines or penalties for non-compliance. Failure to pay taxes owed on time can result in steep financial penalties and even criminal charges in some cases—so it is important to ensure you understand your obligations under each state’s laws before conducting any business activities there.
Additionally, it’s important to stay up-to-date on any changes made to existing laws, as this could significantly impact your business operations depending on where you do most of your transactions.
What are the Methods to Calculate When You Cross Nexus Thresholds?
There are four methods states for you to use to determine when you cross economic nexus thresholds in each state.
If you are a Shopify seller, this is why you have seen more updates on your sales tax liability dashboard since January because your company has crossed economic nexus thresholds during the previous calendar year.
- Previous calendar year: This means you count sales up until the end of December for that state to determine if a company has crossed economic nexus. If yes, you are responsible for collecting and registering in January, the next month (and year), moving forward. If you do not cross that state’s economic threshold in December, you can wait another year and recheck the following December.
- Previous calendar year OR current calendar year: This means you check sales the previous year until December, or at any point during the current calendar year, you would register. But you do not cumulate sales from the previous year. If you did not cross economic nexus thresholds in that state by December, you start at zero sales again in January and see if you cross the thresholds at any month during the current calendar year and if you do, register the following month. Some states say you must register the following day, the following transaction, 30 days…This is the most common method by states.
- Prior 12 months: This means you only look at the prior 12 months at any point in time. Each month you would need to calculate the sales for the previous 12 months to determine if you cross economic nexus thresholds in any state. Includes CT, IL, MN, MS, TN, TX, and VT.
- Prior 4 quarters (only NY): This means you only look at the previous four quarters and check every quarter to see if you crossed the economic nexus threshold in NY, which includes $300K in sales AND 100 transactions.
Are you ready to take control of your sales tax registrations?
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With our expert assistance, you can register for sales tax with confidence and ease. Don’t just take our word for it. Visit this link to discover the full range of services we offer.
Plus, we’ll match you with industry-leading software and companies to handle your sales tax remittance and filing needs. We have partnerships with all the major providers in the market, so you can trust that you’re in good hands.
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