Eleanor Finch
Nexus, also known as taxable presence, is a term used in the context of state tax laws 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 because it determines a company's tax obligations in a particular state. While the specific rules for what constitutes nexus vary across the 50 states, generally, a business will be considered to have nexus when it has a physical presence in the state, such as an office, store, or warehouse, or when it has a certain degree of economic activity or income in the state, even without a physical presence.
| Characteristics | Values |
|---|---|
| Physical presence | Office, store, warehouse, employees, third-party contractors, inventory, real property, vehicles |
| Economic activity | Sales, gross revenue, transactions, income |
| Employees | Workers in another state, independent contractors, salespeople |
| Other | Delivery vehicles, warehouses, housing inventory in another state |
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Physical presence
In general, a business will be considered to have nexus when it has a physical presence in a state, such as an office, store, or warehouse. This can include owning or leasing property, including real estate, furniture, equipment, or inventory. Having employees, agents, brokers, representatives, or subcontractors working on behalf of the company in another state also establishes physical nexus.
Additionally, the presence of tangible property, such as vehicles or inventory, can create nexus. For example, using company-owned vehicles to deliver goods in a jurisdiction will likely create nexus and require the company to collect and remit applicable sales and use taxes. Similarly, housing inventory in another state, whether in a leased or owned warehouse, creates sales tax nexus.
It is important to note that the rules and definitions for determining nexus vary across states and are subject to change. Therefore, businesses must research and stay updated on the specific rules of each state in which they operate to ensure compliance with tax laws.
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Economic nexus
The concept of "nexus" in the context of state tax laws refers to the minimum connection or presence a company needs to have with a state to be subject to that state's taxing authority. This includes sales tax, income tax, gross receipts tax, and more.
The specific criteria for establishing an economic nexus vary from state to state, and the rules are constantly changing. In general, a business will be considered to have an economic nexus with a state when it has a certain degree of economic activity or income in that state, without necessarily having a physical presence. This can include having employees, agents, or contractors working in the state, or owning tangible property such as real estate or inventory.
Following the 2018 South Dakota v. Wayfair decision, every state with a sales tax now has economic nexus requirements for remote out-of-state sellers. This case established that physical presence is not necessary to create a nexus, and states can require tax collection from online retailers and other remote sellers if they meet certain economic thresholds. These thresholds are typically based on a set level of transactions or sales activities, such as a certain number of sales or a minimum gross revenue from consumers in that state.
Businesses should be aware of the specific rules and thresholds for each state in which they operate, as they may be required to register and collect sales tax once they meet the economic nexus criteria. Failure to comply with nexus requirements can result in significant penalties and back taxes.
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Sales tax nexus
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. This includes sales tax, income tax, gross receipts tax, and more.
Physical nexus exists when a company has employees, agents, brokers, representatives, or subcontractors working on their behalf in another state. Other instances of physical nexus include the presence of tangible property, such as a brick-and-mortar store, office, real estate, vehicles, or warehouses.
Economic nexus is created when a business has a certain level of economic activity in a state or jurisdiction, 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. Most states have set a threshold of \$100,000 in sales or 200 separate transactions, with some states adopting slightly different thresholds.
Businesses that fail to properly manage their sales tax obligations may face significant financial penalties, reputational damage, or even legal action. Therefore, it is important for businesses to understand sales tax nexus to accurately calculate the costs of doing business in different jurisdictions and remain compliant with tax laws.
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Independent contractors
The concept of "nexus" in the context of state tax implies that a company has a "taxable presence" in a particular state. While there is no universally shared definition of nexus, it generally means that a business must register to collect or pay taxes in a state. The rules for what constitutes nexus vary across the 50 states of the US, and states regularly change their rules.
For example, in Kansas, Maine, and Georgia, any sellers who have independent contractors in the state for the purpose of making a sale, delivering or taking orders, or installing physical tangible property are required to register and collect sales tax due to substantial nexus with the state. In Illinois, nexus was asserted for an out-of-state company that utilized an Illinois answering service, as the answering service was considered an in-state representative.
Additionally, activities such as warranty repairs, product installation, and training or troubleshooting by independent contractors can also trigger nexus in certain states. It is important to note that the rules and thresholds for nexus vary from state to state, and businesses should consult the specific requirements for each state they operate in.
To determine if business activities have created sales tax nexus in specific states, businesses should confirm that all workers are properly classified for each state, maintain detailed records of transactions and contractor activities, and register for a sales tax permit if necessary. Failure to register after establishing nexus can result in penalties or interest charges.
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Thresholds
The concept of nexus is a critical one in the world of state tax. Nexus, also known as "taxable presence", refers to 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.
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. While there is no universally shared definition of nexus, and the rules vary across the 50 states, physical presence is generally the first consideration in determining nexus. This can include having employees, agents, brokers, representatives, or subcontractors working on behalf of the company in another state, or owning or leasing property in the state.
However, in South Dakota v. Wayfair, the U.S. Supreme Court ruled that physical presence is not necessary to establish nexus. States now have the right to require tax collection from online retailers and other remote retailers with no physical presence in their state if they meet certain economic thresholds. These thresholds are typically based on the number of transactions or revenue generated from sales in the state. Most states have set a threshold of \$100,000 in sales or 200 separate transactions for remote sellers to be considered to have nexus and be required to collect and remit sales tax.
Other ways to establish nexus include having a salesperson or independent contractor in another state, delivering goods using your company's vehicles, and warehousing inventory in another state. Once nexus is established, a company is responsible for registering and collecting any applicable taxes in that jurisdiction.
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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. This includes sales tax, income tax, gross receipts tax, and more.
The definition of "substantial economic activity" differs from state to state. However, some common factors that may establish nexus include:
- Having a physical presence in the state, such as an office, store, or warehouse.
- Having employees or third-party contractors working in the state.
- Reaching a certain sales or transaction threshold, such as $100,000 in sales or 200 separate transactions.
- Having inventory or other personal property in the state.
Yes, certain business activities on their own do not constitute nexus or the need for foreign qualification. These include:
- Defending or settling a lawsuit in the state.
- Handling internal LLC or corporate business in the state.
- Working with independent contractors in the state.
- Conducting a one-time transaction within 180 days.
- Securing or collecting debts from customers in the state.
Yes, a company can have nexus in multiple states if it meets the minimum requirements for each state. The rules and definitions for nexus vary across states, so it is important for businesses to research and keep up with the specific requirements of each state they operate in.
If a company fails to establish nexus in a state where it is considered to be doing business, it may face significant risks and penalties. These can include payment for missed filing fees, back taxes, and interest on any fees and taxes due during the period of non-compliance.
