Understanding where your company has sales tax nexus is the first step in the sales tax compliance journey. The experts at Source Advisors conduct a deep-dive analysis to help you understand where, when, and how you create physical or economic nexus, as well as review possible risks and strategies to improve your sales tax compliance process.
Completing business across state lines can often trigger tax obligations. Understanding and complying with these requirements are critical for compliance. Unfortunately, it isn’t always clear when your company may have a responsibility.
Cross border transactions take many forms, from making sales to customers, hiring employees, or renting property. Whether any of these transactions create a tax obligation hinges on the concept of nexus.
Nexus occurs when a company has sufficient connection with a state to allow the taxing authority to impose a tax. To help you remain compliant and avoid unknown tax liabilities.
Source Advisors experts will conduct a nexus analysis or study to review your business activities and identify when and where nexus was created.
A nexus study analyzes every aspect of your business activities to determine if and why nexus is created. These studies can shed new light on your business’s tax requirements and help you discover ways to avoid costly tax penalties. During a study, the team also examines all applicable tax laws and regulations to determine your tax obligations.
A nexus study is valuable for new and established businesses alike. Laws change, and business activities evolve and develop. So even if you’ve completed a nexus study in the past, an updated analysis can reveal whether you’re still compliant.
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 a sufficient presence in the state to create tax obligations. This means a business has obligations to register, collect, and remit sales tax to a state for sales tax purposes.
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, the marketplace, and affiliate 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.[1]
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.
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. On an annual basis, the case established that a business with over 200 transactions or $100,000 in sales into the state was enough to create a sales tax obligation.[2] 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.[3]
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.
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 economic nexus threshold.[4]
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.
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 a business that does not have a presence in a state.
This activity can create nexus. Some states have click-through nexus regulations, 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.
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