The Truth About Sales Tax Nexus
The concept of nexus was initially a pretty simple one: If you had a physical presence in a state, you have nexus. However, in today’s world of global commerce, the concept of nexus and physical presence has become more complicated.
As a result, we’ve found that the concept of nexus is fuzzy for many online sellers, and we spend a lot of time helping them to determine their compliance responsibilities.
To help you help your clients, we broke the concept of nexus down.
Share this information with your customers to get them more familiar with where they have obligations to collect and remit sales and use tax.
What Does Nexus Even Mean?
Nexus is just a fancy way of saying you have to collect and remit sales tax in a given state. If you don’t have nexus, that means you have no obligation to collect and remit sales and use tax. Having nexus means that you have obligations to collect sales and use tax on taxable transactions within the state or local jurisdiction, and then to report and remit the tax.
Any given business can have nexus in multiple states. Obviously, the more jurisdictions a business has nexus in, the more complex their compliance responsibilities become. Why is there even a nexus requirement? Basically, the law looks at it like this: Does your business get any benefits from the services we as a state provide?
- Do you use the roads and bridges?
- Do you generate trash? (Yes, this is for real. Apparently it is a pretty big deal.)
- Do you in any way benefit from the infrastructure provided by tax revenue?
The Nexus Rules
Unfortunately, as states look for new sources of revenue, they tend to “push the limits” as to exactly what constitutes nexus. Each state determines its own nexus rules, but there are overlying standards derived from two US Supreme Court cases:
- Complete Auto Transit Inc. v. Brady (1977): Held that there must be a substantial connection, or nexus, between the state and the taxpayer.
- Quill Corp. v. North Dakota (1992): Held that a mail-order seller with economic presence, but without physical presence, did not have sufficient substantial connection, or nexus, with North Dakota so as to grant the state the authority to impose a sales tax collection and remittance responsibility on the seller.
While the court provided general guidelines and set some important minimum standards, the states retain substantial authority to determine the types of activities that create nexus, which allows for all sorts of interesting rules.
Types of Nexus
Dependent and independent nexus. In many states, sales tax is applied at the state and local level. With dependent nexus, nexus at any single location within the state creates nexus with all the localities within the state. In independent nexus states, nexus with one locality does not translate to having nexus with all localities. Businesses may have nexus with some cities and counties, but not with others, depending on where they have physical presence. This requires not only knowledge of all the state rates and regulations, but also the various local ones for each city and/or county you sell in.
The following are independent nexus states:
- New Mexico
- South Carolina
Affiliate nexus. This is where states have deemed a company to have nexus based on the activities of related organizations. In this case, even if you have two separate legal entities, there may be overlap. Borders Books and Music ran into this issue in 2005 when the California Court of Appeals said that Borders Online was required to collect tax on California sales, as customers were permitted to return merchandise to the physical brick-and-mortar locations owned by Borders Inc. Even though the dot-com business was set up as a separate legal entity than the physical stores, the court felt they were sufficiently connected and had nexus.
Click-through nexus. New York has a law which states that out-of-state vendors that enter into contractual agreements with New York businesses, whereby the New York business refers customers to the out-of-state business and receives a commission in return based on sales, have nexus with New York.
Several other states have passed similar laws since, including:
- North Carolina
- Rhode Island
- South Carolina
In the end, it is up to you to know where you have nexus. Unfortunately, there is no email that will arrive letting you know, just an audit.
We know it’s complicated and there is work being done to try and simplify things. For example, there is an initiative that aims to simplify sales tax discrepancies from state to state, called the Streamlined Sales Tax initiative. The initiative was created in response to lost revenue due to sales over the Internet. It currently consists of 44 states that have come together to try and develop uniform definitions and rules regarding sales tax.
In order to protect yourself, take a proactive look at your business. Simple things like knowing where you sell products, where those products are coming from, and where you conduct any other business-related activities can make all the difference.
If you have questions, connect with your accountant, CPA, or Taxify.