Malcolm Rivera
Sales tax nexus refers to the connection between a business and a state that requires the business to collect and pay sales tax. In the US, sales tax is regulated at the state level, with each state having different laws, rules, and thresholds. Nexus can be established through a physical presence, such as having employees, business operations, or property within a state, or through an economic presence, such as reaching a certain level of sales or transactions. Businesses need to understand their sales tax nexus to avoid penalties and pay the correct amount of taxes.
| Characteristics | Values |
|---|---|
| Physical nexus | Having a physical connection with the state, such as a store, office, warehouse, employee, salesperson, contractor, etc. |
| Economic nexus | Making a certain amount of sales or transactions in a state, regardless of physical presence |
| Nexus and online businesses | Online businesses may have nexus in a state even without a physical presence there. This includes activities such as electronic chat or the use of cookies for gathering customer data. |
| Nexus and remote workforces | States' nexus rules have been influenced by the increase in remote work, impacting remote online sellers and companies with remote employees. |
| Nexus and tax obligations | Nexus determines a state's ability to impose taxes on a business, including sales tax, income tax, net worth taxes, franchise taxes, and payroll taxes. |
| Nexus and registration | Businesses are required to register and collect taxes in states where they have nexus, even if they have no sales tax liability during that period. |
| Nexus and tax rates | In origin-based sales tax states, businesses charge the sales tax rate effective at their business location. In destination-based sales tax states, they must calculate the sales tax rate where the buyer is located. |
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What You'll Learn
Physical nexus
Prior to the South Dakota v. Wayfair ruling in 2018, physical presence was the standard for sales tax compliance. This meant that a business was only required to collect and remit sales tax in a state if it had a physical presence there, such as offices or employees. However, the South Dakota v. Wayfair decision changed the landscape by allowing states to consider economic business activity in addition to physical presence when determining sales tax compliance. Now, even businesses that do not have a physical store or sales representative in a state may be required to collect sales tax if they meet the economic nexus requirements, such as reaching a certain threshold of transactions or sales activities in that state.
While the specific criteria for physical nexus may differ across states, some common examples of activities that can establish physical nexus include:
- Owning or leasing an office or having a mailing address in the state
- Storing inventory or maintaining a warehouse, even if it is owned or operated by a third party, such as Amazon
- Having employees or representatives present in the state, including remote workers or independent contractors
- Attending trade shows or conventions in the state for the purpose of taking orders or making sales
- Having affiliate links or virtual connections through website cookies with an in-state business
It is important to note that the establishment of physical nexus can have significant tax implications for businesses. Once a business creates a physical nexus in a state, it may be subject to strict tax obligations, including the requirement to register, collect, and remit sales tax to the appropriate tax jurisdiction. Therefore, businesses need to be vigilant about the various ways physical nexus can be established and seek professional advice to ensure compliance with state tax laws.
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Economic nexus
Nexus is triggered when a business's sales activities in a state reach a specific dollar amount and/or number of transactions. This threshold varies by state and can be based on the number of sales, the dollar amount of sales, or a combination of both. For example, in some states, a business must register to collect sales tax once it has made $100,000 in sales or 200 transactions within the state.
The concept of economic nexus has become increasingly relevant with the rise of e-commerce, as online retailers gained an advantage over local businesses by not having to charge and remit sales tax. Following the 2018 South Dakota v. Wayfair ruling by the Supreme Court, states have begun to enforce economic nexus rules more broadly on sellers, including internet retailers.
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Nexus and online businesses
Nexus laws refer to the connection between a business and a taxing jurisdiction, such as a state, that requires the business to collect and remit sales tax in that jurisdiction. This connection is established through a business presence in a state, which can be a physical presence or an economic presence.
For online businesses, the concept of nexus becomes more complex. Before the rise of e-commerce, determining nexus was relatively straightforward: a business would need to collect sales tax in a state if it had a physical presence there, such as a store, office, warehouse, or employee. With the advent of e-commerce, online retailers gained an advantage as they did not have to charge and remit sales tax, and states lost out on taxable income.
In 2018, the South Dakota vs. Wayfair ruling changed the landscape by allowing states to require businesses to collect sales tax even without a physical presence. Now, an "economic" presence, or reaching a certain level of transactions or sales activities in a state, is sufficient to trigger nexus status. This has led to an increase in economic nexus obligations for small businesses that previously operated under economic nexus thresholds.
Online businesses must now navigate the varying definitions, rules, and thresholds for nexus across different states. For example, Texas and Rhode Island have different timelines for when businesses must register and begin collecting sales tax after reaching the economic nexus threshold. Additionally, the specific laws depend on the type of product being sold, with digital products being especially complex due to varying state definitions and tax requirements.
To comply with nexus laws, online businesses should identify their tax obligations, manage registrations, calculate and collect the correct amount of tax, and enable filings. They must also be mindful of the different types of nexus legislation, such as Click-Through Nexus and Affiliate Nexus, which may apply to their operations in different states.
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Nexus and tax compliance
Nexus is a term used to define the level of connection between a taxing jurisdiction, such as a state, and a business. Nexus determination is primarily controlled by the U.S. Constitution, which requires a definite link or minimal connection between a state and the entity it wants to tax.
In 2018, the Supreme Court's decision in South Dakota vs. Wayfair set a new precedent. Now, a state can require a business to collect sales tax even if they don't have a physical store or sales representative there. An "economic" presence, or reaching a set level of transactions or sales activities, is enough to trigger nexus status for a state. This is known as economic nexus. Every state that imposes sales tax has adopted an economic nexus threshold, though the thresholds vary by state. The minimum sales threshold is $100,000, and some states also include a transaction count of 200 transactions. Texas, for example, has a higher threshold of $500,000 in sales.
Businesses must understand their sales tax nexus and corresponding liability to ensure tax compliance. They should review their state footprints and track when they reach economic thresholds, as well as monitor activities that create physical nexus in a state. If a business has a physical nexus in a state, the sales thresholds do not apply, and nexus is created on day one of sales. To navigate the complex landscape of nexus and tax compliance, businesses may need to consider compliance options such as tax compliance software.
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Nexus and state-by-state differences
Nexus refers to the connection between a state and a business that allows the state to require the business to register to collect and remit sales tax. In the US, sales tax is primarily regulated at the state level, and every state has different laws and rules.
Economic nexus is established when a business reaches a certain threshold of sales revenue and/or number of transactions in a state. This threshold varies by state and by product. For example, Pennsylvania's economic nexus threshold is $100,000 in sales, whereas Texas requires out-of-state businesses to register by the first day of the fourth month after they reach the economic nexus threshold.
Businesses that make only nontaxable sales into Wisconsin, or only sell tax-exempt items into Vermont, are not required to register for sales tax.
Other types of nexus include Click-Through Nexus, which requires that a remote seller meets a minimum sales threshold in the state in question resulting from activities of an in-state referral agent. Affiliate Nexus typically requires that a remote retailer holds a substantial interest in, or is owned by, an in-state retailer and sells the same or a substantially similar line of products. Marketplace Nexus legislation typically means that if an online marketplace operates its business in a state and provides e-commerce infrastructure and customer service, the marketplace facilitator is required to register and collect tax as the retailer rather than the individual sellers.
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Frequently asked questions
Sales tax nexus is the level of connection a business has with a state that requires them to collect and pay sales tax.
A nexus can be constituted by a "physical presence" or an "economic connection". A physical nexus can include having a physical location such as an office, store, or warehouse in a state, or having an employee, salesperson, or contractor in a state. An economic nexus is triggered by a business's economic activity within a state, such as reaching a sales or transaction threshold.
If you suspect you might have a sales tax nexus in a state, you can check with that state's taxing authority. You can also refer to each state's specific economic nexus thresholds.
Failing to understand sales tax nexus rules could leave your business on the hook for hefty back taxes and penalties.
