Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state. Nexus is required before a taxing jurisdiction can impose its taxes on an entity.
This has become an important issue for many small businesses in the U.S. when it comes to collecting sales taxes. While the online economy has created a multitude of opportunities for businesses, selling goods to customers in many different states can make sales taxes complicated and confusing.
One of the most important sales tax questions any business must ask is, “Where must we collect, remit and report?” That’s where nexus—a connection between your business and a state—comes in. If your business has nexus in a certain state, you generally must collect sales taxes within that jurisdiction.
Figuring out the answer to that “where” can be tricky, as rules vary widely from state to state, but here are a few examples of how nexus can be created.
One of the most basic nexus rules is that if your business has a physical presence in a state, you will be required to collect and remit sales taxes there. It’s relatively simple if your business is located in a particular state and you only have sales within that state—then, you only collect and remit in your home state.
However, if you have locations of your business in multiple states, you may create nexus in each of those states. This can apply to branches, stores, warehouses, drop-shipping facilities, or any real estate or property that belongs to your company.
Delivery and Distribution
As long as you ship goods to customers by a common carrier such as USPS, UPS, or FedEx, you are unlikely to trigger a sales tax obligation through delivery. In some cases, however, the use of a drop shipper or a contract with a distributor that functions as a drop shipper is considered a taxable nexus-creating activity.
Nexus can also be created if you employ salespeople in different states. If your employees or contractors conduct any work at a customer’s out-of-state location or deliver products in another state, nexus can also apply.
Regularly attending tradeshows in other jurisdictions beyond the physical location of a business can also be considered nexus in certain states.
Advertising and affiliates
If you advertise online or use affiliates to get business, you may trigger nexus. When a business in another state sends customers to your business through links on a website, this can create nexus in the originating state, according to affiliate or click-through nexus laws.
Even if you cease doing business or having a presence in a state, your nexus may not end there—it can have a longer shelf life than you may imagine. You may still be considered to have nexus in that state for a period that can last through the end of the calendar year or even longer after you quit the state.
Growing Net of Nexus
In 1992, the Supreme Court decision in Quill Corp. v. North Dakota (1992) confirmed that, under the Commerce Clause of the U.S. Constitution, vendors with no physical presence in a state did not have nexus requiring them to collect sales tax, even if they make sales to customers in that state.
However, as states attempt to collect as much sales tax as they can, nexus-triggering possibilities keep growing. Amazon.com, for example, collects sales tax in half the states in which it does business due to expanding definitions of nexus.
Sales Tax Solution
Knowing where you have nexus is crucial for small businesses, yet it is a specialized area that requires state-by-state research—and one that changes constantly. It can take a lot of time and effort to make sure you are getting nexus right, and if you don’t, the consequences of non-compliance can cost you even more time—and money. Consult with your Accountants or CPA.