All businesses pay a federal income tax, whether its as its own entity or through the income tax of the owner. But, sales tax is a completely different story. Sales tax is determined by each individual state and the requirements for multiple state businesses are often complicated. sales taxThose requirements get further complex when you are an online business as you may not have any physical presence in the state itself. Whether or not your online business has to pay sales tax all depends on the states’ definition of one word: nexus.

Nexus, also known as sufficient physical presence, is the deciding factor in online sales tax. It is often defined differently depending on the state, but generally a nexus is a physical presence, employees working, or independent contractors soliciting business in the state of the buyer. To find out if your business needs to be collecting sales tax, the best option is to look on the state’s treasury website or Nolo’s sales tax guide for a clear definition of each state’s nexus requirements. In addition, it’s good to know the different types of nexus legislation. The Sales Tax Institute defines two most common types of nexus legislation: Click-Through nexus and Affiliate nexus. Click-Through nexus is when a state requires sales tax once a company has met a minimum in sales in that state due to an in-state referral agent. An Affiliate nexus is one in which the online business gains online sales or directly sells through a brick and mortal store within that state. In general, it all depends on the state’s definition of your influence within its borders.

Amazon is a great example of the complexity of online sales tax legislation. Unlike its competitors, Amazon’s warehouses have given the company nexus in over 25 states. For years, Amazon never collected sales tax. But state by state, the company’s operations and influence were examined, and they were forced to pay sales tax. Amazon also has “Warehouse Deals” that all have sales tax due to the fact that the products come directly from the brick and mortar warehouses. So why doesn’t Overstock and eBay pay sales tax? It all has to do with the assets. Amazon’s physical assets within each state give them the nexus that requires them to pay sales tax.

Your online business doesn’t have to have complicated taxes. As long as you are aware of your nexus status in each state and stay up to date with new legislation, your sales tax collection should be very straight forward.

Concerned about your tax obligations? Worried about collecting sales tax? Our partners at Paychex can help your business with payroll and sales taxes! Click here for a free consultation