Can I Have Nexus in a State I've Never Been In?
- Sales Tax
- May 26, 2016 | Tim Parker
If you’re a business owner with an online presence, you hopefully know of the giant headache you have to endure, called nexus. Nexus is a fancy legal term for a presence in or connection to a place. If you have nexus in a state, you have to collect and remit sales taxes on your sales to buyers in that state.
States want their fair share of tax revenue, so they are happy to institute rules under which business people who have never set foot in their state can establish nexus and be on the took for tax collection. In fact, your business doesn’t even have to make a sale in a state to have nexus there.
How Do I Establish Nexus?
There are a number of ways you can establish nexus, some of which don't require you to have ever been there yourself. Unfortunately, each state has different laws surrounding nexus. What is true in one state might not be the case in another. This makes it difficult for small business owners to stay in compliance without help.
- You own or lease property in the state: Either a warehouse or offices, or personal property like manufacturing equipment or other machinery. You don't have to set foot in the offices. You just have to own them--or rent the equipment to others.
- Advertise in the state: Do you run ads in local media outlets or conduct telemarketing activities either through your company or an outsourced firm? You might have established nexus.
- You provide warranty service: Maybe you didn't make the sale in the state but the customer moved the product. Providing a maintenance, installation, or similar services through your company or a third-party service could establish nexus.
- One of your employees is there: Maybe you have one of those remote businesses where you have employees scattered all over the country. If they’re doing anything to create revenue for your business, that establishes nexus. Even if they’re an independent contractor, it still counts.
- You send trainers: If you have a team that travels around the country training people on how to use your product, that could establish nexus in that state.
- You have affiliates in another state: Some ecommerce sites don't sell their own products. Instead, they sell advertise and push other peoples products. They are often referred to as affiliate relationships. You may have never talked to your affiliates; you might not even know their names. There may be so many you couldn’t possibly keep up with where they are, but there’s a good chance that you establish nexus in certain states where an affiliate is working to send customers your way. About half of all states have click-through nexus laws that don't require you have any physical presence in the state to establish nexus. Affiliate relationships would fall into click-through nexus laws.
- You sell using Fulfillment by Amazon (FBA): Selling your goods via FBA requires you to send your inventory to a certain Amazon warehouse location. But Amazon may send some or all of it to their warehouses across the nation. You likely have nexus in the state where it ends up sitting. Without doing some digging, you won’t know where it is, but that doesn’t mean you didn’t establish nexus. Here’s how to figure it out.
There is no standard when it comes to nexus. States and localities are free to write tax law as they would like. What is true in one state may be completely opposite in another. And some states don’t have a sales tax. The best place to start when figuring all of this out is our tax guides.
Everybody recognizes that nexus is overly complicated, especially for a small business owner who can’t afford high-priced accountants to figure it all out. Legislation like the Marketplace Fairness Act is Congress’s way of trying to tackle the problem, but that bill is the subject of much controversy as well. Who knows if the system will be easier in the near future.
But as a start, remember that just because you’ve never been to the state, or even directly sold anything there, that doesn’t mean that you don’t owe taxes. You very well might.