Employer Identification Numbers (EINs) for Non-US Residents

1. Introduction

Economic nexus is a critical concept for businesses selling goods or services to customers in the United States, particularly in the era of e-commerce. It determines when an out-of-state seller is required to collect and remit sales tax in a U.S. state based on their economic activity, even without a physical presence.

2. What is Economic Nexus?

Economic nexus refers to a business presence in a U.S. state that obligates an out-of-state seller to collect sales tax once a certain threshold of transactions or sales activity is met. Unlike traditional physical nexus, which required a tangible presence (e.g., a store, office, or warehouse), economic nexus is triggered by economic activity, such as reaching a specific sales revenue or transaction volume in a state. Key Characteristics:
  • State-Level Regulation: Sales tax in the U.S. is primarily regulated at the state level, with each state setting its own rules, thresholds, and tax rates. This creates a complex landscape for businesses operating across multiple states.
  • Thresholds Vary: Most states define economic nexus based on sales revenue (e.g., $100,000) or transaction volume (e.g., 200 transactions) over a 12-month period. These thresholds differ by state.
  • Product-Specific Rules: Tax rates and obligations vary not only by state but also by the type of product or service sold. For example, Virginia exempts some gun safes from sales tax, while Chicago taxes e-commerce sales of wine and bottled water.
  • Economic Nexus Treatment by State, 2024-
Souce – https://taxfoundation.org/

3. Historical Context: The Shift to Economic Nexus

Before the rise of e-commerce, determining nexus was straightforward: a business needed to collect sales tax in states where it had a physical presence, such as a store, office, or employee. This changed with the growth of online retail, which gave out-of-state sellers an advantage by allowing them to avoid collecting sales tax, costing states up to $33 billion annually in lost revenue.

The South Dakota vs. Wayfair Ruling (2018)

In 2018, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. revolutionized sales tax compliance. The ruling overturned prior precedents, allowing states to require businesses to collect sales tax based on economic activity rather than physical presence. This decision leveled the playing field between online retailers and local businesses, ensuring fair taxation. Since then, 46 states have adopted economic nexus laws, typically triggered by sales thresholds like $100,000 or 200 transactions in a 12-month period.

4. Key Considerations for Businesses

Economic nexus introduces significant complexity for businesses, especially those selling across multiple states or countries. Below are key considerations for compliance:

4.1. Origin-Based vs. Destination-Based Sales Tax

  • Origin-Based States: In these states, businesses charge the sales tax rate applicable to their business location. For example, a business based in an origin-based state like Arizona would apply Arizona’s tax rate to all sales, regardless of the customer’s location.
  • Destination-Based States: In these states, the tax rate is based on the buyer’s location or where the goods are shipped. This requires businesses to calculate tax rates specific to each customer’s address.
  • Implication: Businesses must determine whether each state they sell into uses origin-based or destination-based rules to apply the correct tax rate. Most states are destination-based, adding complexity for businesses with customers in multiple jurisdictions

4.2. State-Specific Thresholds

Each state sets its own economic nexus thresholds, typically based on sales revenue or transaction volume. For example:

  • Common thresholds include $100,000 in sales or 200 transactions within a 12-month period.
  • Businesses must track sales and transactions by state to identify when thresholds are met, triggering registration and tax collection obligations.
  • Economic Nexus State by State Chart – Refer to this link https://www.salestaxinstitute.com/

4.3. Streamlined Sales and Use Tax Agreement (SSUTA)

The SSUTA is an initiative by 24 states to simplify sales tax compliance across jurisdictions. It aims to standardize tax rules and streamline registration and filing processes. However, since many states do not participate, businesses must still navigate varying state-specific guidelines.

  • Action: Businesses should visit each state’s tax authority website for detailed filing requirements and deadlines, as these vary significantly. For instance, Tennessee requires monthly filings if sales tax exceeds $200, but annual filings otherwise.

4.4. Physical Presence Still Matters–

While economic nexus focuses on sales activity, physical presence (e.g., a store, warehouse, or even a contractor installing equipment) automatically triggers nexus and tax obligations in a state.

5. Compliance Challenges and Risks

Failing to comply with economic nexus laws can result in significant penalties:

  1. Penalties for Non-Compliance: If a business should have collected sales tax but failed to, it must pay past-due taxes out of pocket, plus interest and penalties averaging 30% of the tax due.
  2. Filing Requirements: Businesses must file taxes in all states where they are registered, even if no tax is owed for a given period.
  3. Complexity: The variability in state laws, tax rates, and product-specific exemptions (e.g., Virginia’s gun safe exemption) makes manual compliance challenging, especially for businesses selling into multiple states.

6. Strategies for Compliance

To navigate economic nexus, businesses can adopt the following strategies:

  1. Monitor Sales Activity: Track sales and transactions by state to identify when economic nexus thresholds are met. This may require robust accounting or tax software.
  2. Register with State Tax Authorities: Once a threshold is reached, register with the relevant state’s tax authority to collect and remit sales tax.
  3. Determine Tax Rates: Use tools or services to calculate origin-based or destination-based tax rates accurately, accounting for state and local variations.
  4. File and Remit Taxes: Adhere to state-specific filing deadlines, which may be monthly, quarterly, or annually, depending on sales volume and state rules.
  5. Leverage Technology: Use automated tax compliance solutions like Stripe Tax to streamline the process.

7. Conclusion

Economic nexus has transformed sales tax compliance in the U.S., particularly for e-commerce businesses. The 2018 South Dakota v. Wayfair ruling expanded state authority to tax out-of-state sellers based on economic activity, closing a significant loophole and increasing revenue for states. However, this shift has introduced complexity for businesses, with varying state thresholds, tax rates, and filing requirements. Tools like Stripe Tax offer a streamlined solution to manage these obligations, enabling businesses to comply efficiently while focusing on growth. By understanding economic nexus and leveraging technology, businesses can navigate this complex landscape and avoid costly penalties.

8. Resources for Further Understanding