Jonah Patel
Nexus is a legal term referring to a tax obligation, which requires businesses to collect sales tax in a state. Typically, a physical presence in a state establishes nexus, however, this is not always the case. For example, in Pennsylvania, advertising through catalogs was deemed sufficient to establish nexus, although the seller was not required to collect sales tax. In New York, advertising alone was not considered to establish nexus. In Alabama, it is unclear whether online advertising creates nexus. In the context of tort cases, advertising is used by law firms to attract clients, and television is a popular medium for this purpose.
| Characteristics | Values |
|---|---|
| Nexus | A legal term that means "tax obligation" |
| Nexus | A substantial connection between a business and a state which would require the business to collect sales tax |
| Physical nexus | A permanent presence of any significant amount of real or personal property within a state |
| Online advertising nexus | It is unclear whether online advertising creates nexus in Alabama |
| Online advertising does not create nexus in New York and Pennsylvania | |
| Mass tort cases | TV advertising is used to attract mass tort cases |
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What You'll Learn
Online advertising and nexus
Nexus is a legal term that means "tax obligation". It refers to the connection between a business and a state, which would require the business to collect sales tax from customers in that state. Typically, nexus has been established by a company's physical presence in a state, such as having staff, shops, or warehouses. However, with the rise of online advertising and e-commerce, the concept of nexus has evolved and become more complex.
In the United States, the laws regarding nexus vary from state to state, and some states have not provided clear guidance on whether online advertising creates nexus. For example, in Alabama, it is unclear if online advertising creates nexus, as the laws allow the state to require sellers to collect sales tax if they maintain contact with the state, but this is limited by federal laws. Similarly, in Florida, it is uncertain if online advertising establishes nexus.
On the other hand, some states have explicitly stated that online advertising does not create nexus. For instance, New York, Pennsylvania, and the District of Columbia generally do not consider online advertising as a basis for nexus. These states typically require a physical presence, such as an employee or contractor, for a business to be considered "engaging in business" within their borders.
Despite these variations, it is worth noting that the concept of economic nexus has emerged following the South Dakota v. Wayfair case in 2018. This concept focuses on gross receipts and transaction thresholds, requiring out-of-state sellers to register and collect sales tax if they meet certain economic criteria. As a result, even without a physical presence, a business may still have a tax obligation in a state due to economic nexus laws.
In conclusion, the relationship between online advertising and nexus is intricate and subject to change. While some states rely on traditional definitions of nexus centred on physical presence, others are embracing the evolving nature of commerce by considering economic factors and digital connections. As online advertising continues to play a significant role in business operations, it is likely that the legal understanding of nexus will further adapt to reflect these developments.
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Physical nexus vs economic nexus
Nexus is a legal term that means "tax obligation". It refers to the connection between a business and a state, which would require the business to collect sales tax from customers. Nexus is split into two categories: physical nexus and economic nexus.
Physical nexus is created when a business has a physical presence in a state, such as a store, warehouse, or office. This type of nexus is the traditional standard for sales tax collection and has been established through various court cases. Examples of physical nexus include a business that has a physical location, employees, or inventory in a state.
Economic nexus, on the other hand, is created when a business has a certain level of economic activity in a state, even if it does not have a physical presence there. Economic nexus laws typically set a threshold for sales, transactions, or revenue generated in a state; if that threshold is met or exceeded, the business is required to collect and remit sales tax. For example, an out-of-state corporation may trigger nexus by conducting a certain amount of economic activity within the state (e.g. $100,000 of annual sales to customers in the state).
The distinction between physical nexus and economic nexus is important for businesses to understand, as it determines their tax obligations. In the past, physical nexus was the primary consideration for sales tax collection. However, with the rise of online businesses, economic nexus has become increasingly relevant. Following the 2018 South Dakota v. Wayfair case, economic nexus became the prevailing standard for sales and use tax nexus. This means that even if a business does not have a physical presence in a state, it may still be required to collect sales tax if it meets certain economic thresholds.
It is worth noting that the rules and requirements for sales tax nexus vary by state and jurisdiction. For example, New York and Pennsylvania generally do not allow online advertising to create sales tax nexus, while Alabama's laws are unclear. Therefore, businesses must pay close attention to the specific laws and thresholds in each state to ensure compliance with all applicable tax laws and avoid potential penalties.
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Advertising and tax nexus in Pennsylvania
The concept of nexus in sales tax refers to a substantial connection between a business and a state, which would require the business to collect and remit sales tax from customers. Nexus simply means a business is ''connected' to a state and must follow state tax rules.
In the context of advertising and tax nexus in Pennsylvania, it is important to understand the state's specific rules and regulations. Pennsylvania has historically held that regularly or substantially soliciting orders within the state, whether through catalogs, click-through technology, or other methods, can create sales tax nexus. This means that if a business regularly advertises and generates sales in Pennsylvania, it may be required to register with the Pennsylvania Department of Revenue and collect and remit the appropriate tax, even if it does not have a physical presence in the state.
However, it is important to note that Pennsylvania generally does not consider online advertising as a sole factor in creating sales tax nexus. In a 1986 case, the Commonwealth Court of Pennsylvania ruled that a seller who advertised through catalogs but had no other physical presence in the state was not liable for collecting and remitting sales tax. This decision was based on the US Supreme Court ruling in National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967).
Despite this, Pennsylvania has updated its nexus standards for corporate income tax purposes. Previously, a company had to have a physical presence in Pennsylvania to be considered as having nexus. However, under the new rules, a company is considered to have nexus with Pennsylvania if it does business in the state, with a presumption that any business with more than $500,000 in sales in the state has taxable nexus, regardless of physical presence. This change aligns with the factor presence approach used by other states, where nexus is established when factors like property, payroll, or sales exceed a given amount.
In conclusion, while online advertising alone may not create sales tax nexus in Pennsylvania, it can be a factor when combined with other activities or sales revenue. Businesses should carefully review Pennsylvania's tax laws and regulations to understand their tax obligations and ensure compliance.
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Alabama's advertising nexus laws
The concept of 'nexus' in sales tax refers to a business's substantial connection to a state, which would require the business to collect sales tax. Nexus can be established through a company's physical presence in a state or through economic nexus.
In Alabama, substantial nexus is established if a company has over $50,000 of property or payroll in the state or over 25% of total property, total payroll, or total sales in the state during the tax period. Additionally, Alabama has enacted an economic nexus rule for out-of-state sellers, which came into effect on January 1, 2016. This rule does not set a strict economic presence test but adds an economic sales threshold that will apply if the seller also conducts other activities in the state that establish nexus. An out-of-state seller is required to collect Alabama tax when their retail sales of tangible personal property sold into the state exceed $250,000 per year, based on the previous calendar year's sales.
In 2018, Newegg Inc. filed a lawsuit against Alabama's economic nexus regulation and won. As a result, Alabama is poised to revise its regulation to conform to the South Dakota v. Wayfair case. The Alabama Department of Revenue (DOR) has stated that it intends to amend the regulation and will not enforce the rule until it is amended, if necessary.
It is worth noting that the presence of an independent contractor or third-party representative performing services for an out-of-state taxpayer can create nexus for the taxpayer in the state where the services are performed. This has been the case in several states, including Illinois and North Dakota.
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Branded vs generic advertising in tort cases
In the context of tort cases, advertising can play a significant role in attracting clients and building a brand. Law firms have the option to choose between branded and generic advertising campaigns, each with its own advantages and considerations.
Branded advertising campaigns are those that are associated with a specific law firm or legal brand. These campaigns can help establish the firm as a trusted and recognised source of information and representation. For example, firms like Pulaski & Middleman and Parilman & Associates have become household names through effective branding on television. Branded campaigns can also be tailored to specific services or lawyers within a firm, such as providing a vanity phone number for a particular type of case. This approach allows firms to become well-known and potentially attract a higher volume of clients.
On the other hand, generic advertising campaigns are not associated with a specific law firm. These campaigns are more cost-effective and can still drive a positive response from potential clients. By not mentioning a specific law firm, generic campaigns can create a "halo effect", attracting clients without the higher costs associated with branded campaigns. This approach may be particularly attractive to firms that want to focus on performance and pay for the calls or leads generated, rather than paying upfront for media buys.
The choice between branded and generic advertising in tort cases depends on the firm's goals and resources. Some firms may opt for a combination of both approaches to maximise their reach. It is important to consider the benefits of each strategy and allocate resources effectively to attract mass tort cases.
In terms of the nexus in a tort case, it refers to the connection between a business or individual and a state for tax purposes. Advertising may play a role in establishing this connection, particularly in states with specific laws regarding online advertising and sales tax nexus. However, the impact of advertising on nexus varies from state to state, and other factors such as physical presence or economic nexus may also be considered.
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Frequently asked questions
Nexus is a legal term referring to a "tax obligation". It means that a business has a substantial connection to a state and is therefore required to collect sales tax from customers in that state.
The relationship between advertising and nexus varies from state to state. In some states, like New York, Pennsylvania, and North Carolina, online advertising does not create sales tax nexus. In Alabama, it is unclear whether online advertising creates nexus, but the distribution of physical advertising materials can create nexus. In Illinois, nexus was asserted for an out-of-state company that utilized an in-state answering service, demonstrating that nexus can be created through certain services even if the company has no other physical presence in the state.
Law firms can use branded or generic advertising campaigns on television, radio, print, or mobile to attract clients for tort cases. Branded campaigns can help make a law firm a household name and establish trust with potential clients. However, some firms prefer to use generic campaigns to stay out of the spotlight and save their brand for the courtroom.
