Sales tax nexus for small businesses: tracking sales by state

Two kinds of nexus

"Nexus" is the connection with a state that obliges a seller to register, collect and remit that state's sales tax. There are two broad kinds:

• Physical nexus. An office, a store, employees, inventory in a warehouse or regular visits by your staff can create nexus in a state, regardless of how much you sell there.
• Economic nexus. Since the US Supreme Court's 2018 decision in South Dakota v. Wayfair, states can require remote sellers to collect sales tax once their sales into the state pass a threshold, even with no physical presence.

Almost every state with a statewide sales tax now has an economic-nexus rule for remote sellers. A handful of states have no statewide sales tax at all, though local taxes can still apply in some places.

How thresholds are measured

Thresholds look simple, often a sales figure such as USD 100,000 a year, sometimes alongside a number of transactions. The detail is where small businesses get caught:

• The test. Some states use sales only. Some use sales or a transaction count, and a few require both.
• The window. States measure over different periods: the previous calendar year, the current calendar year, or the last twelve months.
• What counts. States differ on whether exempt sales, sales for resale and sales made through a marketplace facilitator count toward the threshold.
• Change. Several states have dropped their transaction-count tests in recent years, and others may follow. A threshold table needs reviewing every year.

Because of these differences, any nexus report is an indicator, not a ruling. Use it to know which states to discuss with your tax adviser and when.

What to record on every invoice

Nexus tracking only works if each sale can be placed in a state. Make these part of invoicing, not quarter-end clean-up:

• The ship-to or destination state for goods, and the state where the customer receives the service where that is the rule.
• The customer's state on the customer record, as a fallback when an invoice has no destination.
• Taxable and exempt lines kept apart, so the taxable value per state is visible.
• Exemption and resale certificates kept on file for customers you do not charge tax, with expiry dates.
• Credit notes linked to the invoice they reduce, so a refund lowers the right state's total.

A monthly nexus routine

1. Fix missing states first. Find invoices with no state and correct the customer record or the invoice.
2. Review sales by state for the month: sales excluding tax, taxable and exempt values and tax collected.
3. Check each state against its threshold over the window that state uses.
4. Flag states you are approaching, not only those you have crossed, so registration is planned rather than rushed.
5. Take crossings to your adviser promptly. Once you cross a threshold, a state typically expects you to register and start collecting from a set date, and late registration can mean paying tax you never collected.

How NAQIX helps you track nexus

NAQIX has two US sales tax reports, built from the same posted invoices, debit notes and credit notes as your ledger.

Sales by State places each sale in a state using its place of supply, or otherwise the customer's state. Sales with neither appear as "No state recorded" rather than being guessed, and customers known to be abroad appear as outside the US. For each state it shows invoices, sales excluding tax, taxable and exempt values and tax collected, and you can open a state to see its documents.

Nexus Summary compares your sales and transactions in each state with that state's economic-nexus threshold, measured over the last twelve months, this calendar year or last calendar year. Each state is marked as threshold reached, approaching (80% or more of a threshold), below, or no sales tax, and you can open the documents behind any state.

Treat both as estimates for review with your adviser. States measure differently, physical presence creates nexus regardless of thresholds, and NAQIX does not register you with any state or file sales tax returns. Tax rates are set up in your tax settings rather than looked up by address, so confirm the rates you charge with your adviser too.

The NAQIX page for the United States states the same limits, and the Tax & compliance and Sales & billing pages list the related features.

After you cross a threshold

Crossing a threshold starts a sequence that your adviser will walk you through: register with the state, set up the correct rates for the places you ship to, start charging tax on taxable sales from the required date, and file returns on the schedule the state assigns. Your books need to support each step. Tax collected should post to a liability account per state, not to income, and the by-state report for each filing period should agree with that liability before the return is filed and the tax is paid.

When to talk to an adviser

Bring in a sales tax adviser when a state shows as approaching, when you add a warehouse or remote employee in a new state, when you start selling through a marketplace, or when a customer asks you to charge tax in a state where you are not registered. Bring the by-state report and the documents behind it; it will make the conversation shorter and the advice more specific.