Frequently Asked Questions About Nexus
Since the monumental Wayfair v. South Dakota ruling, we have seen many changes to nexus laws nationwide. Now more than ever, it is essential for businesses to analyze their nexus requirements to ensure they are compliant with state regulations. Failing to do so can lead to steep liabilities, including interest, penalties, and other fees.
Since sales tax is a trustee tax, the corporate veil does not protect against these liabilities. As a result, the company officers or owners assume responsibility.
There are several questions we hear surrounding nexus and how a business can determine its obligations.
Some common questions include:
Sales Tax Nexus
What is nexus?
Nexus is the connection between a state and a business entity. If a business is determined to have nexus in a particular state, that means the company has sufficient presence in the state to create tax obligations. For sales tax purposes, this means a business has obligations to register, collect, and remit sales tax to a state.
How is nexus created?
Nexus occurs under multiple circumstances. The most common way is through a physical presence in a state such as having employees, offices, or storing inventory. However, after the 2018 South Dakota v. Wayfair ruling, businesses can create nexus by simply delivering products or providing remote services into a state (i.e., economic nexus). Other forms of nexus exist, such as click-through, marketplace, and affiliate nexus.
I am a foreign or out-of-state business with remote workers, agents, or contractors. Do I have sales tax nexus?
Having remote employees is enough physical presence to create nexus. The rules surrounding contractors and agents vary state-to-state. However, some states, such as Florida, would consider having a contractor working full-time hours in a client-facing role as enough presence to create nexus.
Do I create nexus by traveling into other states for business purposes?
Many states would consider crossing into a state to perform services, deliver goods, promote, or consult as enough activity to create nexus. Even if no other type of physical presence exists, these business activities could potentially create nexus.
What is economic nexus?
Economic nexus is how out-of-state-sellers (“remote sellers”) can create nexus without physical presence due to their gross receipts derived from customers and clients located in a state. After the 2018 South Dakota v. Wayfair ruling, most states have implemented some form of economic nexus thresholds for remote sellers. The case established that, on an annual basis, a business with over 200 transactions or $100,000 in sales into the state was enough to create a sales tax obligation. States have adopted the thresholds set by the supreme court ruling with some states increasing the sales threshold, others removing the transaction count, and in Kansas’ case, eliminating the thresholds all-together.
Do economic nexus rules replace physical nexus?
Economic nexus rules do not eliminate the physical presence standard for nexus. If a business has minimal sales below the economic nexus threshold in a state where it has a physical presence, it will still be required to follow the state’s sales tax regulations.
I am a service provider; I do not sell products. Do economic nexus rules apply to my business?
States typically define remote sellers as a business that sells tangible personal property (“TPP”) or provides services to customers located in a state where it does not have a physical presence. There is a common misconception that economic nexus rules only apply to e-commerce businesses or online sellers. Economic nexus rules apply to any company, even businesses that engage in selling software-as-a-service (“SaaS”), digital products, professional services, and consulting.
I am a wholesaler, drop-shipper, or provide non-taxable services. Do economic nexus rules apply to my business?
The answer will depend on the state and what their specific economic rules outline. Most states have chosen to include non-taxable sales or wholesales in determining economic nexus thresholds. A state could still require you to comply with their sales tax obligations, including registering with the state, filing periodic returns with zero tax due, and collecting exemption certificates from your customers. Some states, such as Illinois, have explicitly stated that non-taxable sales do not count towards the threshold for economic nexus.
I am a marketplace seller. Do I have nexus obligations?
If a business sells through online marketplace platforms such as Amazon, eBay, or Walmart, they may notice sales tax automatically applied to many of their sales to customers. This is because most states have marketplace nexus rules. These rules require marketplace facilitators to collect on behalf of sellers and remit directly to the state. This may make things easier for businesses selling on a marketplace platform, but this method is not void of complications. For example, if you also sell through your company website, you may need to consider all your sales when determining economic nexus thresholds, including any sales made through marketplaces. Marketplace facilitators regularly store your inventory in multiple states, which potentially creates filing obligations, even if all your sales tax collection is taken care of by the facilitator.
In addition, not every state has marketplace nexus rules. For more answers on marketplace sellers, visit here.
My business only has nexus in one state, but a related or commonly owned company provides services for my business. Does this create nexus exposure in the state where the commonly owned business has nexus?
Some states could define this type of activity as affiliate nexus. Although not every state has affiliate nexus rules. Those that do have different definitions of what constitutes affiliate nexus. For the most part, a commonly owned entity providing services on behalf of another entity can create nexus for the business that does not have a presence in a state.
My business receives referrals from a partner located in another state from their website. Does this create nexus?
This activity can create nexus. Some states have click-through nexus regulations, which is a type of nexus made through online referrals with commission payments to site owners. Over 20 states have click-through nexus regulations with different thresholds, often between $5,000 – 10,000 in annual sales.
Additional Nexus Questions?
In every case, we recommend contacting a trusted tax advisor at PMBA (firstname.lastname@example.org) or the taxing jurisdiction before a decision is made regarding your sales and use tax compliance needs.