Physical vs. Economic Nexus – The Differences

Physical vs Economic Nexus – The Differences With many states in the United States and the potential customer reach nationwide, businesses in the US often need to deal with the customers from different states. They need to sell their products and send them to the customers in other states, even though they might not have any established office or traditional store there. With today’s domination of e-commerce platforms, many businesses in the US will have more and more opportunities to reach and expand their customers to include those living in different states.

However, it doesn’t mean that they can just do business as usual with people from other states. By doing business with people from other states, they are establishing a nexus in their business. Nexus means the connection between their business with certain states where their business is operating, which makes them eligible to collect sales tax in that area. So, as the result of reaching more customers in other states, businesses in the United States also need to collect sales tax for their products and services sold in the interstates. For more help to understand about sales tax nexus, go here.

The Old Rule – Physical Nexus Sales Tax

In the past, before the e-commerce giants like Amazon, eBay, Wal-Mart, and others dominated the business landscape, businesses in the United States were eligible to collect sales tax only if they have a business presence in other states. With no business presence in other states, the state cannot enforce the sales tax nexus rules for the business. They cannot require the business to collect sales tax from their products since there is no official presence of their business in the state.

This physical nexus sales tax rule was fine before e-commerce and the popularization of online business. With the change of the technological landscape involving buying and selling, a newer nexus sales tax rule needs to be established.

The New Rule – Economic Nexus Sales Tax

In 2018, the United States government released a new sales tax rule for businesses operating in other states. It doesn’t matter if they have any business presence in other states or not. Any business that sells products and services interstate needs to register for the eligibility to collect sales tax for their products, and they need to pay for the sales tax to the local state authorities once they’ve reached a certain sales threshold.

This is the new rule for the interstate buying and selling activities in the United States, and each state has their own threshold that businesses need to reach per year. Each business needs to pay the sales tax for their products and services sold in the state when they reach the sales threshold during the year. If they don’t reach any sales threshold, then they don’t need to pay any taxes to the respective state.

Economic nexus makes it possible for states to have more revenue streams from businesses operating in their state from other states, and they can also help local businesses get an advantage when competing with the out-of-state sellers. Local businesses can offer more competitive pricing, and they no longer need to worry that interstate sellers might dominate the market with their low pricing models.

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