Avalara Tax Guides

Nexus and Multistate Sales Taxes: Complex Concerns for Manufacturers

Companies that operate in multiple states know that sales and use tax laws can be complicated, confusing, and even ambiguous. Regulations vary from state to state and frequently change.

Multistate tax issues are difficult for all industries, but manufacturing faces its own set of challenges. As manufacturers expand across state lines, they must track the complex, ever-shifting laws that affect the many aspects of their operations, from maintaining facilities to selling online to offering repair services.

Manufacturing businesses may not realize that core elements of their operations, such as installation and drop-shipping, may create obligations to various states outside the company’s home state − a concept known as nexus.

Nexus, a legal term also commonly referred to as “sufficient physical presence,” means that a business’s activity in a state meets a legal threshold for the state to tax it according to the U.S. Constitution. In the case of sales tax, having nexus means a business must collect and remit taxes on sales to customers in that state. Each state defines this presence in its own way, setting the rules for what gives a business nexus to include anything from operating an office or warehouse to receiving clickthrough referrals from someone living in the state.

The last decade has seen a huge expansion in the strength and breadth of nexus laws. Legislation concerning nexus is nothing new: Courts have been debating the principles involved since at least 1939, and the word itself has been associated with tax law since 1967. But since the 2008 recession, nexus has been a focus of renewed and ferocious debate as states facing budget deficits expanded the list of nexus-creating activities in an effort to capture sales tax revenue from out-of-state online retailers.