Eleanor Finch
Nexus, also known as taxable presence, is a term that describes the minimum connection a company needs to have with a state to be subject to the state's taxing scheme. Nexus determination is primarily controlled by the U.S. Constitution, in which the Due Process Clause requires a definite link or minimal connection between a state and the entity it wants to tax. The Commerce Clause requires a substantial presence, which was traditionally interpreted as a physical presence. However, in South Dakota v. Wayfair, the Court eliminated the physical presence rule, allowing states to establish nexus through substantial economic activity. This has resulted in a lack of uniformity across the states, with different definitions and rules for determining nexus.
| Characteristics | Values |
|---|---|
| Physical presence | Office, store, warehouse, salespeople, delivery drivers, contractors, third-party representatives |
| Economic activity | Sales, income, revenue |
| Remote workers | Referral agents, salespeople, contractors |
| Property | Owned or rented |
| Goods storage | Fulfillment center, warehouse |
| Referral partnerships | Rewarding partners for referring customers through a web link or in-state website |
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What You'll Learn
Physical presence: an office, store, warehouse, or salesperson
Nexus, also known as "taxable presence", is the term that describes the minimum connection a company needs to have with a state to be subject to the state's taxing scheme. This includes sales tax, income tax, gross receipts tax, and more. The rules for what constitutes nexus vary across the 50 states.
Physical presence is a primary factor in determining nexus. A business will be considered to have nexus when it has a physical presence in a state, such as an office, store, or warehouse. However, the criteria for a physical nexus are broader than that. For example, a company physically based in a state without sales tax but with remote employees and contractors based in a state with sales tax will be subject to the latter state's physical nexus requirements.
The physical presence of a salesperson or representative can also trigger a sales tax collection obligation in a state. This includes the regular presence of traveling salespeople or representatives, as well as attending a trade show in the state for the purpose of taking orders or making sales.
Before the South Dakota v. Wayfair case in 2018, physical presence was the standard for sales tax compliance. Now, if businesses cross an annual minimum threshold of $100,000 in transactions in a state, they may be required to collect and remit sales tax in that state, even without a physical presence. This is called an economic nexus.
It is important to note that the specific criteria for determining physical nexus may differ from state to state, and businesses should seek professional advice to ensure compliance with state tax laws.
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Economic activity: sales, income, or revenue
Nexus, also known as "taxable presence", is the term used to describe the minimum connection a company needs to have with a state to be subject to the state's taxing scheme. This includes sales tax, income tax, gross receipts tax, and more. The concept of nexus is important for business owners to understand to ensure their company remains in good legal standing.
Economic nexus is established when a company has a "substantial economic activity" in a state. This can include sales, income, or revenue. The definition of "substantial economic activity" varies from state to state, so it is important to understand the specific rules and thresholds for each state.
In South Dakota v. Wayfair, the U.S. Supreme Court ruled that states could establish economic nexus standards. This means that if a company makes a certain number of sales or generates a minimum amount of revenue from consumers in a state, nexus is established, and the company is responsible for collecting and remitting sales tax in that state.
Other ways to establish nexus include having a physical presence in the state, such as an office, store, or warehouse, or through activities such as employing remote workers, storing goods in a fulfillment center, or delivering goods using the company's vehicles. Additionally, click-through nexus can be established when an out-of-state business makes significant sales through referrals from individuals or businesses in another state.
It is important to note that the rules and thresholds for establishing nexus vary across the 50 states, and the concept of nexus is constantly evolving, with frequent updates and changes. Businesses should seek specific guidance for each state to ensure compliance with the law.
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Click-through nexus: sales through in-state referrals
Click-through nexus is a specific type of nexus that arises from affiliate relationships. It occurs when a business uses in-state affiliates to refer customers to its website in exchange for a commission or other form of compensation. This relationship creates a sufficient connection between the business and the state, requiring the business to collect and remit sales tax on sales made through these referrals.
The concept of click-through nexus gained prominence with the rise of e-commerce and online marketing, with 16% of online sales now generated via affiliate marketing. States began to recognize that businesses could generate substantial sales through online affiliates without having a physical presence in the state. To capture the lost sales tax revenue, states implemented click-through nexus laws.
Click-through nexus legislation typically requires that a remote seller meets a minimum sales threshold in the state in question, resulting from the activities of an in-state referral agent. The seller must be making commission payments to the in-state resident for any orders that come about as a result of the click-through referral from the resident's website.
Many states have a de minimis threshold for click-through nexus, meaning the referrals must generate a certain amount of sales during a specified time period. For example, in Connecticut, click-through nexus may be established when an out-of-state seller rewards a Connecticut resident for directly or indirectly referring potential purchasers to the seller by an internet link, and gross receipts from sales from such referrals exceed $100,000 during the preceding four quarterly periods.
It is important to note that definitions and rules for determining nexus change constantly, and most states are careful to give themselves room to maneuver in their definitions. This means that a business must look at each state individually when determining sales tax nexus and must stay constantly on top of changing regulations and interpretations.
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Property: renting or owning
When it comes to property, renting or owning can constitute a minimum contact to establish nexus, or "taxable presence", in a state. This is because nexus is the term used to describe the minimum connection a company needs to have with a state to be subject to its taxing scheme.
Physical presence nexus is a traditional standard for sales tax collection. This means that a business has a physical presence in a state, such as a store, warehouse, office, or other property. This can also include having employees or contractors working in the state. For example, in California, a business establishes sales tax nexus if it has more than $500,000 in sales in the current or previous calendar year.
Economic nexus is another standard that looks at the levels of economic activity within a state to determine if a business activity creates nexus. These statutes generally require out-of-state businesses to collect or pay tax in a state if they meet a specified threshold of sales made or revenue generated within the state. For example, in Massachusetts, corporations create nexus and are subject to corporate excise tax jurisdiction if in-state sales exceed $500,000, including sales of unitary business affiliates from either economic or virtual contacts.
It's important to note that each state has its own sales tax laws and rates, as well as varying definitions of the levels of activity that must be present to generate state income tax nexus. Therefore, it's crucial for businesses to work closely with their internal operations team and accounting firm to determine their nexus in each state and develop a tax planning strategy.
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Remote workers: delivery drivers or contractors
The rise of remote work has revolutionized the business landscape, offering flexibility and access to a global talent pool. However, it has also introduced complexities, especially concerning "nexus", a legal term defining a business's tax presence in a state. Understanding and addressing these challenges is crucial for businesses to remain compliant.
Nexus refers to the connection between a business and a state, which obligates the business to comply with the state's tax laws. Traditionally, nexus was established through a physical presence, such as offices or employees in a state. However, with remote work, even a single employee working from another state can create nexus, subjecting the business to that state's tax regulations. This has significant implications for businesses with remote workers, including delivery drivers or contractors, who may now be operating in multiple states.
For example, consider a company based in State A that hires a remote contractor based in State B. This arrangement may establish nexus in State B, requiring the company to register for state taxes, withhold income taxes for the contractor, and comply with State B's employment laws. This highlights the need for businesses to be vigilant and informed about the tax implications of their remote workforce.
To navigate these complexities, businesses should implement proactive strategies and stay informed about legislative changes. This includes conducting nexus assessments by evaluating employee work locations, business activities, and state-specific tax regulations. Additionally, businesses can leverage technology for accurate tax calculations, compliance reporting, and nexus determination. By staying proactive and informed, businesses can future-proof their operations against the complexities of multi-state tax obligations.
It's worth noting that during the COVID-19 pandemic, some states provided temporary relief regarding nexus and remote work. However, as we move into a recovery phase, businesses should carefully consider the impact of a remote workforce on their state tax nexus and prepare for potential changes in legislation and nexus thresholds.
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Frequently asked questions
Nexus, also known as "taxable presence", is the term that describes the minimum connection a company needs to have with a state in order to be subject to the state's taxing scheme.
The minimum contact required to establish nexus can vary across states. However, some common factors that can establish nexus include:
- Physical presence: This includes having an office, store, warehouse, or employees in the state.
- Economic activity: Reaching a certain sales or revenue threshold, such as a specific number of transactions or a minimum amount of sales or gross revenue.
- Employees or contractors: Having employees or independent contractors working in another state can establish nexus.
- Services performed: Providing services in another state, even if the services are not subject to sales tax, can result in sales tax nexus.
- Deliveries and warehousing: Using your own vehicles to deliver goods or housing inventory in another state can create nexus.
While the definition of "substantial economic activity" differs from state to state, a majority of states have set a threshold of $100,000 in sales or 200 separate transactions.
Once nexus is established, a business is generally required to register and collect sales tax in that state. Nexus can also impact a company's income tax obligations and compliance with state tax laws.
Certain business activities on their own may not constitute doing business and therefore may not require nexus establishment. These activities can include defending a lawsuit in the state, handling internal corporate business, working with independent contractors, conducting one-time transactions, or securing or collecting debts from customers in the state.
