Chapter 4: Nexus and Sales Tax Laws
Sales tax is a complicated world. We’ve put together this series to give you the information you need to navigate the complexities of compliance, as well as the solutions offered through sales tax technology. In this chapter, we cover the various types of sales tax nexus and explain some of the different sales tax laws.
What is sales tax nexus?
Nexus can be simple to define, but complicated to determine. In a nutshell, sales tax nexus is a business’s connection to a jurisdiction, which creates an obligation to collect and remit sales tax. There are many types of nexus, and each jurisdiction chooses when and how to implement them. What establishes nexus in one state or province may not in another, and it’s up to the business to know the difference and remain compliant. For a visual breakdown of the various types of nexus and how states impose tax obligations, see our Sales tax laws by state guide.
Different types of nexus
Physical presence nexus is based on a physical tie to a state. This can be a store, warehouse, distribution center, remote employees, or even participating in a trade show or expo. The exact details vary from state to state, but generally speaking, any physical aspect of conducting business is enough to establish nexus in most states.
Economic nexus is established when a business reaches a certain level of economic activity within a state, whether in terms of transactions completed or the dollar amount of sales rendered.
Affiliate nexus is created when a business establishes a relationship with another entity and sales result from that relationship. This can include design and development of goods or solicitation of sales of goods on behalf of the retailer.
Click-through nexus is based on a business’s contract with another entity or individual to directly or indirectly refer potential clients through links on an in-state website. Nexus is established when those ads generate a certain amount of business.
Cookie or software nexus occurs when a business transmits a code snippet to a customer. Some states have determined that this meets the qualification of physical presence, and the code is enough to establish a nexus obligation for sales associated with these transmissions.
Common sales tax laws
It cannot be overstated that each jurisdiction applies sales tax laws individually, and it’s vital for businesses to properly research the details for each and every jurisdiction in which they conduct business. Here are some of the sales tax laws applied within the United States.
Marketplace facilitator laws require marketplaces selling third-party goods to collect and remit sales tax on behalf of vendors. States with these laws collect sales tax from a single, larger entity, like Amazon or Etsy, rather than the hundreds or thousands of smaller businesses selling on the platform. As a bonus for the state, nexus is often based on whether the marketplace as a whole meets the thresholds, rather than the sales activity of individual businesses.
Read more about marketplace facilitator laws and how they apply in each state:
State-by-state guide to marketplace facilitator laws
Non-collecting seller use tax reporting laws impact businesses whose sales have not reached nexus thresholds. These businesses are instead required to notify their customers about the use tax liability incurred with their purchase. In addition, businesses need to supply an annual summary of these purchases and a report about their use tax obligation. Not all states have these laws, but it’s important for businesses to know if they make sales in the ones that do.
Learn more about how states apply non-collecting seller use laws:
State-by-state guide to non-collecting seller use tax