When dealing with customers based in the US, you might find yourself having to pay sales tax as dictated by the state your customer is located in. Sales tax in the US is not uniformly implemented throughout the entire country but is instead given to each individual state to govern. Therefore, each state has its own tax, making the US tax system complicated to navigate.
Fortunately, Deskera Books, your accounting software is able to determine the sales taxes required for products and services sold to a customer automatically.
The US Taxation article series is to help you understand how US sales taxes are being calculated. However, there is no need for you to worry about calculating the sales taxes manually.
There are some factors to consider when computing for the US sales tax:
- Nexus
- Product Classification
- Exemption from sales taxes
- Out of state transactions - Origin VS Destination State Tax
We will be explaining what nexus is in this article. You may also click on the other points to read more about what they entail.
What is Nexus?
Nexus is typically defined as having a significant presence or a commercial connection within the state to warrant sales tax.
To determine whether your business has nexus in a particular state, you need to check each state's unique criteria to qualify as having nexus in that state.
Some of these criteria have a threshold (e.g., 200 transactions within that state regardless of monetary value), which qualifies you as having nexus in that state.
These criteria may include the following:
- Physical presence in the state
- This traditionally indicates having a physical location within the state itself. However, it also includes having a sales representative attend an event in that state, which results in sufficient sales generation, without any permanent office.
- Economic activity in the state
- This is usually applicable to remote sellers or e-commerce businesses that do not have a physical brick-and-mortar store but have business transactions within a US state.
- Having affiliates, referrals or legal ties in that state which channels economic gain to you
- You may trigger nexus in some states if you have generated revenue via an in-state marketing ad click-through that resulted in a purchase. This is also known as Amazon tax.
- Using a third-party fulfillment service or drop shipping within these states are also considered as being affiliated with your company and may trigger nexus.
- The use of web cookies which results in sales generated
- A few states consider the use of cookies in a device within the state to be sufficient enough to trigger nexus. However, these usually come with a relatively high threshold.
What do I have to do if I have Nexus?
Once you have confirmed that you have nexus in a particular state, you should check on how to file the tax returns for that state.
Here are the general steps that you will need to take:
1. Firstly, register your sales tax permit in the state.
2. Charge sales tax to customers in that state
3. File sales tax returns
Deskera Books allows you to keep track of the transactions made in different states and the subsequent taxes owed to the state. You will need to file your taxes through the appropriate channels after you have confirmed that you have nexus in the states involved.
What does this mean for me as a Deskera user?
To ensure that the US states involved in your transactions have been successfully captured, you will need to ensure that all addresses input in Deskera must be complete, accurate, and recognizable, Do take note to input accurate information of all the addresses together with the exact state, city, county and zip code in order to generate the right amount of sales tax rate as the tax varies as per source and even destination. As this information is crucial for the computation of sales tax.
Aside from providing the right information of the address, the product category is also a crucial factor in determining the tax rate you’ll have to pay for your business. Using Deskera’s Books software, our software will capture which products that are liable for sales tax as well.
When you are filling up your business address or your Contacts’ address, there will be a suggested address prompted to you after filling up the address field. If that’s an accurate address suggested, click on the suggested address button. If not, stick to your original address.