Everything you wanted to know about sales tax nexus but were afraid to ask
Location, location, location. This is a mantra in the real estate industry, but it’s also an important issue to many 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 sales people 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 trade shows 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 U.S. Supreme Court decision in Quill Corp. v. North Dakota 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 makes sales to customers in that state.
However, the Supreme Court overruled Quill's physical presence rule on June 21, 2018. In South Dakota v. Wayfair, Inc., the court found economic and virtual activity to be sufficient grounds for nexus. Approximately 20 states have already adopted economic nexus provisions similar to the South Dakota law, and more are looking to do so. Learn more about South Dakota v. Wayfair, Inc. and its potential impact.
And states are expanding nexus in other ways, too. Several maintain that the software (e.g., web cookies) internet vendors place on in-state devices establishes a physical connection to the state and an obligation to tax. Some now require marketplace facilitators to collect and remit tax on behalf of their third-party sellers. Use tax notice and reporting requirements for non-collecting sellers are also being enforced in several states. One way or another, states are intent on obtaining more tax revenue from remote sales.
Sales tax solution
Knowing where you have nexus is crucial for 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 noncompliance can cost you even more time — and money.
One solution is automated sales tax software such as Avalara AvaTax. AvaTax integrates seamlessly into the most popular accounting and ecommerce solutions to provide automated sales tax calculations based on the latest rules, rates, and boundaries. AvaTax knows where you have nexus and the right amount of sales tax that you need to collect. Learn more.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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