Decoding state sales tax nexus
To be sales tax compliant, you have to understand where you have nexus.
Sales tax nexus is the connection between a seller and a state that triggers a tax collection obligation for the seller. If you don’t have nexus with a state, it can’t force you to collect or remit sales tax. If you do have nexus, it can.
Different states have different nexus triggers, which can complicate compliance. And the fact that many states are changing the way they define nexus to capture more remote sales tax revenue has compounded confusion. Wakefield Research reports that 94 percent of 2017 survey respondents have misconceptions around what creates nexus. Wow.
Read on to better understand the business activities that may trigger nexus for your business.
Physical presence creates nexus
Sales tax nexus has long been linked to having a physical presence in a taxing jurisdiction. If your business has a physical presence like an office, store, or warehouse in a state, you have nexus and an obligation to collect and remit sales tax in that state.
That seems straightforward. Yet, physical presence isn’t always as obvious as it seems. Some other physical presence nexus triggers may include:
Event attendance. Sending an employee or independent contractor to a state to attend a conference or trade show can trigger nexus, especially if sales are generated from the event — even if they occur well after it. These laws vary widely by state. In California, for example, vendors can participate in trade shows for up to 15 days without necessarily triggering nexus. In Texas, however, attending just one day of a trade show could create a tax obligation
Storing inventory. The presence of inventory in a state can also establish nexus. With the increase of online marketplaces such as eBay, Etsy, and the Amazon and Walmart marketplaces, a growing number of states have passed laws that tax marketplace sales. While some hold the marketplace facilitator (e.g., Amazon) liable for the tax, others say the marketplace seller is responsible for it.
Trailing nexus. Once you’ve established nexus, it can be hard to get rid of it. Some states have what’s called trailing nexus, meaning it lingers after you’ve severed your connection to the state. Trailing nexus can last as little as a month or longer than a year, during which time you’re liable for sales tax on any sales delivered into the state.
Beyond physical presence
Further complicating compliance is the fact that many states — more than half — have passed laws extending nexus beyond just a physical presence, so they can increase remote sales tax revenue collections. While each state law is unique, these nexus-expanding laws can be broadly categorized as follows:
Affiliate nexus. In some states, being affiliated with a business or individual in the state can trigger nexus if sales are generated from the relationship. States with affiliate nexus include, but aren’t limited to, California, Illinois, and Louisiana.
Click-through nexus. In some states, contracting with a business or individual to directly or indirectly refer potential clients through links on an in-state website can give you nexus if those ads generate a certain amount of business. States with click-through nexus include, but aren’t limited to, Connecticut, Michigan, and New York.
Economic nexus. In some states, economic activity alone is enough to trigger nexus: For example, if in a calendar year you have $100,000 in sales of taxable goods or services in the state, or 200 separate sales transactions of the same, you may trigger nexus in some states. States that have enacted economic nexus laws include, but aren’t limited to, Alabama, Massachusetts, and South Dakota — and each law is unique.
Using web cookies. Furthermore, a few states now maintain that software or web cookies can give a business nexus. Massachusetts was the first state to claim that internet vendors are different from catalog vendors because of the apps and cookies they put on the computers and devices of in-state consumers. Connecticut and Ohio followed suit, and if these laws succeed in increasing remote sales tax revenue, others are likely to do the same.
Is all this legal?
Many laws that expand nexus beyond physical presence have been challenged. Some states welcome a lawsuit, as they hope it will allow them to challenge the physical presence precedent. When Alabama enacted economic nexus, it invited a legal challenge.
South Dakota’s economic nexus law is currently under scrutiny at the Supreme Court of the United States, which heard oral arguments for South Dakota v. Wayfair, Inc. on April 17, 2018. The state has asked the court to repeal the physical presence standard it upheld in a 1992 ruling (Quill Corp. v. North Dakota). Wayfair, Inc. et al are asking the court to uphold the physical presence requirement. A decision is expected in June.
In the meantime, whether states have the authority to impose a tax collection obligation on a business that doesn’t have a physical presence in a state is unclear. Yet that isn’t stopping some states from playing hard ball with non-collecting businesses.
Not having nexus doesn’t necessarily get you off the hook
Even if you don’t have affiliate, click-through, or economic nexus, or any sort of physical presence in a state, you could still have certain obligations if you make sales there.
A growing number of states have implemented use tax notice and reporting for non-collecting sellers. Non-collecting vendors that do a certain amount of business in a state generally are required to:
- Notify consumers that they don’t collect sales tax and that use tax may be due
- Send customers annual reports of their purchase activity
- Send the state tax authority annual reports of customer purchase activity
States hope these onerous requirements will encourage remote retailers to voluntarily register to collect and remit sales tax. If not, they’ll at least help the tax authorities enforce use tax compliance.
Want to know more?
Nexus is a complicated concept made more complex by state efforts to expand it beyond a traditional physical presence.
If you make sales in states where you don’t collect and remit sales tax, we encourage you to develop a deeper understanding of nexus and how it could impact your business. To that end, we invite you to:
Read the ebook, Know Your Nexus, which digs deeper into the above nexus triggers, and more.
Attend the webinar, Decoding Nexus Triggers and Obligations, to hear Avalara Vice President Clifford Turner discuss what triggers nexus and how new nexus laws can impact your business.