Sales tax nexus
Determining where and when you need to collect and remit sales tax
What is sales tax nexus?
Sales tax nexus is the connection between a seller and a state that requires the seller to collect and remit tax on sales made in that state. While nexus might be an easy concept to understand, it can be challenging to determine what activities or thresholds trigger a nexus obligation, where you've established nexus, and how it can impact your business.
Three questions every business should ask
What triggers nexus?
Sales tax nexus has long been linked to physical presence, but even physical presence can sometimes be hard to define. And with the explosion of ecommerce and a recent U.S. Supreme Court ruling (South Dakota v. Wayfair, Inc.), physical presence is no longer the de facto standard for establishing nexus. Details on specific business activities that can cause a nexus obligation can be found below.
How can you determine sales tax nexus?
To stay on top of changing responsibilities and your sales tax nexus obligations, you need to understand what business activities trigger nexus, monitor fluctuating or expanding activities that may trigger nexus, and review state tax authority updates and jurisdictional nuances. You can learn more about active sales tax nexus laws at the state level with our nexus assessment tool.
What should you do when nexus is established?
When sales tax nexus is established, you must register with the state, which includes filling out the appropriate registration forms correctly and submitting to the right taxing authority. Once registration is complete, you must start collecting and remitting sales tax in the new jurisdiction. If you established nexus in the past, but failed to register or haven’t been collecting sales tax, you’ll need to act to achieve compliance.
Activities that trigger sales tax nexus
Common business activities can create new nexus obligations
If your business has a physical presence in a state — such as a brick-and-mortar location — you’re required to collect and remit sales tax within that state. Physical presence also includes renting or owning property, employing remote workers, even storing property in a fulfillment center or location owned by someone else.
The ruling in South Dakota v. Wayfair, Inc. has paved the way for economic activity (i.e., sales or transaction volume alone) to establish economic nexus in many states. Following the decision, almost 30 states are now enacting or enforcing economic thresholds that require out-of-state sellers to register, collect, and remit sales tax.
Online referrals such as contracts with an individual or business in another state to directly or indirectly refer potential customers through a web link or an in-state website can establish nexus. This is sometimes called click-through nexus. Most states have tied a sales threshold to online referrals or click-through activity, meaning you must generate a certain amount of sales to trigger sales tax nexus.
Sales tax nexus can be established if an out-of-state retailer is affiliated with an entity that has nexus in another state. An affiliate connection includes using a similar trademark or conducting business on behalf of an out-of-state seller.
People can be your biggest asset, and can also trigger sales tax nexus in a new jurisdiction in some surprising ways. Employees that telecommute, independent contractors, traveling representatives, even employees sent to a conference or event can establish nexus in some states.
While it’s easy to see why physical presence creates a connection, other activities are not so obvious. Advertising, drop shipping, or referrals from in-state businesses are all activities that can trigger sales tax nexus. Additional activities that establish nexus can be found in our Know Your Nexus ebook.
State-by-state guide to economic nexus rules for sales tax
Since South Dakota v. Wayfair, Inc., many remote sellers are gearing up for additional sales tax obligations. Check out our state-by-state guide to see if your business has new sales tax obligations.
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Free nexus resources
Know your nexus
Determine where and when you need to collect and remit sales tax to keep up with tax laws.
I think I have nexus ... now what?
Identify what to consider and when to take action if you establish new sales tax obligations.
Understanding economic nexus
Figure out what the South Dakota v. Wayfair, Inc. decision may mean for your business.
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