Business, Money, sale tax

Sales Tax Nexus – A newly defined term

Sales Tax Nexus Definition

The term sales tax nexus has always existed in the business sector. But the understanding and meaning changed over the years. 

The fundamental definition of sales tax nexus is the connection between a seller (company) and a country. Based on the intensity of connection, the seller might be required to pay taxes. Every company is required to pay taxes in certain ways.

Sales Tax Nexus
Sales Tax Nexus

The common way was that a business pays taxes to the country it is located in because it mostly sells the products in the same country. So, the definition of the nexus for most companies was pretty clear and simple. Click here to learn more about sales and tax.

After global economics has grown more and more, bilateral connections became stronger, and businesses worked and sold internationally, the term sales tax nexus gained new popularity.

Location, Location, Location!

It became more important to discuss the meaning of where a company is located, and where it sells its products. The system became more complex because companies produced in one country (for various reasons like low production costs, loose guidelines for the production, etc.) and sold their products in another country because the demand or prices are higher.

Companies saw the benefits of working globally: efficiency, productivity, and extreme profit increases. 

Global Profits and Sales Tax Nexus
Global Profits and Sales Tax Nexus

So, countries had to define when an entity has to pay taxes to the tax authority because the way businesses work has changed. To make it fair, every tax law had to adapt to the real-life changes, so businesses have the same conditions without having benefits when they are located in a certain country.

With rapid digitalization, the term had to be adapted again, because the aspect of location was defined differently. A lot of e-commerce companies are selling worldwide without having a physical presence. Physical presence was one condition that defined the nexus between a country and a business.

Defining Location
Defining Location

Now, this term can’t be a defining point, because many companies only work online in most countries but do a lot of sales in various locations. So, the focus shifted to how much a company sells in a certain country to define the nexus between the two entities.

Aspects that can trigger Nexus

The term sales tax nexus became more complex and specialized. Aspects that can trigger the sales tax nexus are as follows: 

  • Economic activity,
  • Remote employees,
  • Physical presence,
  • Affiliate relationships,
  • Click-through nexus,
  • …and more. 

Many companies still try to find ways to reduce or eliminate nexus in a country, so they don’t have to pay taxes everywhere.

Covid’s Effect on Nexus

The Covid-pandemic caused many companies to make their staff work remotely, some companies closed up their physical location to reduce costs, and only focus on working online as efficiently as possible. This complicates the definition of nexus even more. 

Covid affected taxes
Covid affected taxes

Answering Questions

Companies have to find answers to questions like where do we pay taxes, do we pay tax to all countries we sell products, do we pay tax to where most staff are located? Do we have to pay tax in a country where we only produce or have an inventory?

Seek professional advice for your sales tax nexus
Seek advice from a professional for your sales tax nexus.

Whether you are just starting out or have an established business, professionals can help companies find the best economic and legal solution to all those questions. As sales tax nexus is becoming more complex, experts are needed to clarify the situation of a company to make sure the business pays taxes to the right tax authority.