What is sales tax nexus in Texas and why is it important?

TL;DR

• Nexus is the connection that your business has with a state, through a physical presence or an economic threshold.
• Once you have nexus in a state, you have a sales tax liability and need to register for a seller's permit there.
• If you are unaware of your sales tax liability and don't collect and pay sales taxes, you will have to pay the amount yourself, added with penalties and interest charges.
• You can have nexus through physical presence (a physical store or the presence of people associated with your business).
• You will also have nexus in Texas if you are a part of an event, even if you are advertising or making sales there for just one day.
• Remote sellers will have economic nexus in Texas if their annual revenue has crossed $500,000 through business in Texas.
• If the remote seller is associated with a business in Texas through ownership interest, there will be affiliate nexus.
• If the seller sells through a marketplace, the marketplace facilitator will have to collect sales taxes on behalf of the marketplace seller.
• In the case of dropshipping, sales tax obligations will vary based on nexus and location. The person who has nexus (out-of-state seller or dropshipper) will have to collect taxes from the customer.

What is nexus and why is it important?

'Nexus' is the link between a business and a state. In other words, if you are engaged in business and make taxable sales in a state, you will have nexus there, and this will create a sales tax liability for you. As a seller, you need to know whether you are commercially bound to a state, and whether you need to register for a permit there, and collect and pay sales taxes. You can have a defined presence in a state through stores, employees, contractors, affiliates, salespeople, as well as online sales that cross a certain threshold.

Knowing whether you have nexus in a state is key to identifying whether you have a sales tax obligation. Each state has different rules about how one can hold nexus there, and Texas has its own. This guide will explain why it is crucial to know whether you have nexus, the different ways in which you can have nexus in Texas (physically or remotely), and what you need to do next.

• If you are unaware of your sales tax liability and fail to collect and pay sales taxes to the state, you may end up owing the amount you failed to collect from your customers while making taxable sales. This amount may be added on with interests and penalties, if you continue to avoid payment to the state where you have nexus.
• Knowing how you hold business in a state, even as a remote seller, is crucial because each seller may be tied to a state in a different way. This will help you know on what conditions you have nexus, and whether you have to register for a sales tax permit. For example, despite being an out-of-state seller, you may be storing your goods in a warehouse in another state, and this will create nexus there. Based on this, you will have to register with the state and begin collecting sales taxes.

Types of nexus

There are different ways in which nexus can be created, and you need to know what will create a sales tax liability for you in Texas.

Nexus through physical presence

The primary way in which you can have nexus in a state is through a physical presence. You can have nexus in Texas if your business has:

• A physical space, such as stores, offices, spaces to store inventory, distribution centers, sample and storage rooms, kiosks, warehouses.
• People associated with your business to help your business grow in the state, such as direct employees, representatives, traveling salespeople, agents, contractors, and consultants.

Beyond these two major factors, storing goods in an Amazon Fulfillment Center in Texas will also create nexus. Unlike some of the other states, you will also have nexus in Texas if you are a part of an event, even if you are advertising or making sales there for just one day. These events may be festivals, trade shows, conventions, or flea markets.

Nexus for online and remote sellers
Sales tax liabilities are not limited to those who are physically present in the state. Online and remote sellers may also have nexus in Texas through these ways:

1. Economic nexus

If you are an online or remote seller and have made an annual revenue of more than $500,000 through business in Texas, you have nexus there. This revenue consists of gross revenue from taxable and non-taxable sales of goods and services in Texas, along with sales to tax-exempt organizations and sales intended for resale. This amount should have been crossed in the preceding 12 calendar months. Once you cross this threshold amount, you will have to register for a permit by the 1st day of the 4th month after the period in which you exceeded this amount. For example, if you have crossed this threshold between August 2020 to August 2021, you should register for a permit by 1st December, 2021, and begin collecting sales taxes from then.   

Note: Texas has a 'safe harbor' threshold, where remote sellers who make less than $500,000 through taxable sales in Texas in the preceding 12 calendar months, do not have to register, collect, and pay sales taxes. 

2. Affiliate nexus

If you are a remote seller who is associated or affiliated with another business in Texas, you will have affiliate nexus. So, if you hold an ownership interest in a business in Texas, or if your business is fully or partly owned by the Texas business, you will have a sales tax liability because of this affiliate nexus. However, a few conditions apply for out-of-state sellers to have affiliate nexus:

• The out-of-state seller's business should be selling the same or similar line of products as the Texas business, with a business name that is the same or similar to the Texas business.
• The Texas business's employees or facilities should be used by the out-of-state seller to advertise/promote sales/establish a marketplace for Texas customers.
• The Texas business should maintain a physical space in the state (like a distribution center or warehouse) and should deliver the goods sold by the out-of-state seller to the end consumer.

3. Marketplace nexus

Marketplace seller: If you make sales through a marketplace (which can be a physical store or website), you are a marketplace seller.

Marketplace facilitator: A marketplace facilitator/provider is an entity that is in charge of the marketplace, and processes sales, fulfills orders, payments and deliveries for the marketplace seller. Examples of marketplace providers include eBay and Amazon.

If you make sales only through a marketplace, the marketplace will be in charge of collecting and remitting sales taxes for sales made into the state. The marketplace provider will have to certify that they are collecting this on your behalf. For all other sales made outside a marketplace, you will have to collect, report and pay sales taxes. You will also have to maintain records of the sales made through the marketplace.

Note: While remote sellers do not need to get a permit for selling through a marketplace, sellers located in Texas will have to get a sales tax permit, even if sales are made only through a marketplace.

4. Dropshipping

Dropshipping in Texas can take place when an out-of state seller/retailer places an order with a wholesaler in Texas, and the wholesaler ships the product to the retailer's customer in Texas. This can happen when an out-of-state seller/retailer has a contract with a dropshipper in Texas. Therefore, there are two sales and one consumer, as the dropshipper (manufacturer or wholesaler) sells the product to the out-of-state retailer, and the retailer sells the product to the customer. The dropshipper delivers the product to the final consumer.

Sales tax obligations can depend on location and nexus:

• If the out-of-state retailer has nexus in Texas, they have to collect taxes from their customer and provide a resale certificate to the dropshipper. If they don't have nexus there, then the transaction is not taxed.
• If the dropshipper has nexus in Texas, the dropshipper has to collect sales tax from the out-of-state retailer, unless the latter provides a resale certificate.
• If neither has nexus, the customer has to pay use tax.  

Note: Texas accepts out-of-state resale certificates.

What's next?

Once you know you have nexus, you need to register your business with the tax authority and obtain a seller's permit. This will take you one step closer to following through with your sales tax compliance.

To focus on your business and manage taxes as well, it's always best to use accounting software that will help you balance it out. Zoho Books is an online accounting solution that eases your tax burden by helping you focus on your revenue, and stay tax compliant with easy sales tax management. Sign up with us here!