Nexus is when a vendor has a “substantial physical presence” within another state and is therefore required to collect sales and use tax on the goods sold in that state. “Substantial physical presence” is defined in various ways depending on the state, but some general events that would lead to having nexus within a state include leasing, maintaining, occupying or using any office, warehouse or place of business for the sale and/or storage of goods; employees traveling to another state to generate sales on a regular basis; employees, contractors, agents or other representatives operating business in another state.
If you sell online, you could also be responsible for click-through nexus and economic nexus.
Click-through nexus gets more complicated than sales tax nexus, so hang with us.
Click-through nexus occurs when you have an affiliate in a different state. What is an affiliate? An affiliate is a vendor that you have a contractual agreement with, meaning they will link to your company site on their website in exchange for a portion of your sales or compensation. This means if someone clicks on that link, you are automatically qualified for click-through nexus.
Click-through nexus doesn’t require any physical presence, meaning it can occur even if you don’t have an office, employee, warehouse, etc. in the state where your vendor does business. Like sales tax nexus, click-through nexus varies state by state, so it’s important that you understand who your affiliates are and where they reside.
Economic nexus occurs when you make a certain amount of money or a certain number of transactions in a state. These numbers also vary state by state and don’t require having a physical presence in a state to qualify. Some states don’t have economic nexus, but those that do have thresholds ranging from $10K to $500K.
The History of Nexus and How It’s Changed
In 1991, Quill Corp. v. North Dakota established that a physical presence in a state triggered sales tax nexus. This meant that having an office, warehouse, distributor, or employee in a state required you to pay sales tax. In 2018, South Dakota v. Wayfair introduced nexus to online retail. The new ruling favored South Dakota, requiring out-of-state sellers to collect sales tax if they made 200 transactions or more, or delivered more than $100K worth of goods and services to the state. This new ruling sparked states across the country to enact similar nexus rules, changing the online retail landscape completely.
Abiding by Nexus Laws
You may be asking yourself—how do I know I have nexus? What can I do to ensure I am obliging to nexus rules?
In order to stay on top of nexus rules, it’s important to know the state nexus rules, so you can decipher if you have nexus in another state and collect accordingly. There are a variety of resources out there that outline nexus rules by state, but consulting an expert in this area is strongly advised. A CPA can perform a nexus study for each state in question to let you know what your obligations are there.
Something to consider when looking at your sales tax nexus is sourcing. Sourcing is the idea that each state is either an origin or destination-based tax collector. If the state where you do business is origin-based, then your sales tax should be collected based on where you, the seller, are located. If the state where you do business is destination-based, then you collect sales tax based on where your buyer is located. As a general rule of thumb, most states want remote sellers to charge destination-based sales tax (the sales tax based on where your buyer is located).
Sourcing is key to deciding how to tax your customers in each state, so it’s important to understand the rulesfor where you sell and do business early on.
Sales Tax Permit
If you do have nexus in a state, it’s important that you obtain a sales tax permit. You will need a permit for each state you have nexus and the process to obtain a permit varies state by state. Once you register for a permit, you can start collecting sales tax for that state.
If you realize you’ve been neglecting your nexus obligations, contact an expert right away. They can help you sort things out and ensure your business is staying compliant.