Sales and Use Tax for Business in North Carolina
Part II: Nexus
Last month’s blog covered what sales and use taxes are, as well as how businesses file and pay them. We also briefly mentioned that the sales tax obligation comes from nexus. This month, we’ll cover more about what that means and what types of businesses it applies to.
In the simplest terms, nexus arises from a specific connection between seller (or business) and a state. If a business has nexus, then they must collect tax from consumers in that state. In order to have nexus – and thus a sales tax obligation – a company needs some sort of business presence or activity in that state. Since nexus laws vary from state to state, make sure to check your business’s sales and use tax requirements in the states you do business in.
Destination vs. Origin States
Some states calculate sales tax from the business’s location, and some tax from the buyer’s location. North Carolina carries the designation of destination state, assessing tax based on the ship-to location. In origin states, tax is paid where the sale is initiated, or where the business maintains a physical location.
In most cases, just having a physical, brick-and-mortar store or a home office inside a state establishes nexus. This may also include a home-based office or work-from-home employees. However, with the rise of e-commerce, states have pushed to have sales tax definitions broadened. In 2018, the Supreme Court ruled to allow for remote seller nexus (South Dakota v. Wayfair, Inc.). Now, by selling products or services in a different state, businesses can subject themselves to sales tax.
Types of Nexus
What type of business activity determines a nexus relationship? There are many, all relating in some fashion to your economic activity inside a particular state. If your employees, agents, or representatives are in another state, you might have nexus. Nexus relationships can exist based on where your inventory warehouses or data servers are stored. If you have cookies on computers in another state or attend trade shows, also check your nexus status. Amazon marketplace sellers have to contend with sales tax both in their base state and in the ship-to state. These sellers likely also need to factor in tax where the products are warehoused.
Some states determine thresholds, or an economic nexus, meaning if your business sells under a specified limit, there is no sales tax. A business selling inside North Carolina but located elsewhere, for instance, would pay tax on sales above $100,000 or greater than 200 transactions. And several states offer a flat tax option, leading to easier calculations.
North Carolina also carries an affiliate nexus for out-of-state businesses with gross receipts above $10,000 from direct affiliates. Other types include software nexus, marketplace sales nexus, and click-through nexus. Once a business establishes a nexus presence or activity, make sure it’s properly registered in that state. And then remain compliant by following the taxing authority’s reporting requirements.
Sales tax and nexus are complex concepts to understand, and this might raise more questions than answers. To understand your business’s sales and use tax requirements, and answer your questions, contact your bookkeeper or CPA. Another resource is a Durham, NC company called Avalera. Avalera provides sales tax compliance options and numerous resources. For more info, go to: https://www.avalara.com