They say it’s a small world, and there’s no doubt that the connectivity made possible through the internet has brought us all even closer together. For e-commerce businesses, that means that borders no longer limit potential customers, and you can sell your products internationally with relative ease. While e-commerce allows companies to sell products in other countries, there are still regulations, laws, and guidelines that need to be followed. This is particularly true when it comes to paying taxes. When determining where and what is owed to the taxman, the first step is determining the nexus of your business.
What is Nexus?
In simple terms, nexus is defined as the relationship between a seller and a state that requires that seller to register with the state, and then collect and remit sales tax on all sales made in that state.
Nexus has often been linked to physical presence. But with the increase in e-commerce, physical presence is no longer the only standard for establishing nexus. The Wayfair decision in 2018 changed e-commerce and sales tax rules forever, especially how remote sales are taxed and considered when determining nexus. The decision overruled the need for physical presence and allowed states to require remote sellers to collect and pay sales tax. Since then, many states have created new rules defining what can determine nexus.
There are many business activities that can trigger nexus status with a state.
- Economic activity
- Physical presence
- Remote employees
- Click-through nexus
- Affiliate relationships
- Other activities (advertising, storing inventory, drop shipping, receiving referrals from in-state businesses, even event attendance)
How are Canadian Businesses Affected?
The key financial issue for Canadian e-commerce businesses when it comes to selling in the USA is nexus. It is vital to keep track of which states you do business in and how much business. If you achieve nexus in a state, then you need to follow the guidelines for that state. Failing to do so can have bad consequences. You could even be prevented from doing business in that state ever again.
What do you do once nexus is determined?
Nexus responsibilities vary from state to state. It is important to track the states where you are doing business to determine if you have nexus based on their current guidelines. Once you have determined that you have nexus in a state, you need to register, accurately track sales tax, and pay it to that state government based on their specific requirements. Laws around determining nexus often change, so it’s important to regularly stay up to date on the rules and regulations for each state where you have or may have nexus.
Even if you cease doing business in a state, once you’ve established nexus it can continue for a period of time beyond when you stop doing business there. This is called trailing nexus, and it can last anywhere from a quarter to the end of a calendar year or even longer AFTER you cease doing business in that state. Failure to accurately report and pay sales tax during this period can come with additional consequences.
Here is a link to a great article providing sales tax guidance in the US and Canada specifically for Shopify or Amazon e-commerce businesses.
When you’re selling goods and services online, the more you expand, the more important it is to keep track of this complex system of rules and regulations. But keeping track of nexus and managing sales tax across multiple states can be a logistical nightmare, especially if you haven’t set it up correctly in the first place. You need accurate and timely financial information to keep up with it and pay everyone on time.
While it all sounds confusing, with the right tools, it can be simple to navigate your tax liabilities. At AIS Solutions, we help business owners understand how bookkeeping services can streamline workflows and simplify the management of high volume e-Commerce businesses. We can also help you with determining where your business has nexus and help you navigate the process. Learn more about our Bookkeeping services for e-Commerce here.