Sales tax nexus is the criteria that exists between a business and a taxing authority — like a state or municipality — making that business liable to that jurisdiction’s sales and use tax laws.
But with tax laws, nothing is ever simple. Activities that establish sales tax nexus in one state or jurisdiction may not apply to another. That’s why understanding your company’s nexus is extremely important for staying tax compliant in all applicable jurisdictions.
In this article:
- Sales tax nexus is the legal criteria that makes a business responsible for collecting and remitting sales and use tax laws to the applicable state or municipality.
- There are several types of nexus, including physical, affiliate, click-through, and economic nexus. We discuss each type in this article.
- A nexus study helps businesses stay tax compliant by understanding the full scope of its nexus footprint.
What business activities trigger sales tax nexus?
>> Physical Presence Nexus
Physical presence nexus has historically been the criteria for determining local sales and use tax obligation.
Physical presence in a jurisdiction includes activities like:
- Having a physical office, warehouse, storefront, or other location within the state
- Holding any property (including intangible assets and inventory) in the state
- Having employees work within the state
- Having employees regularly travel to the state to perform business activities
- Delivering tangible goods to the state’s residents (by any delivery method)
- Performing services within the state (including repairs)
>> Affiliate Nexus
Having affiliates located within a jurisdiction also establishes nexus. When a sale is generated from the affiliate in that state, the business must collect and remit sales and use taxes.
Do online activities trigger sales tax nexus?
Yes, remote sellers can establish nexus in states where they do not hold physical nexus. There are two important nexus laws to understand: click-through nexus and economic nexus.
>> Click-through Nexus
In 2008, New York established the very first “click-through nexus” statute, sometimes referred to as “Amazon laws.” As a subset of affiliate nexus, click-through nexus exists when a remote online retailer advertises on another company’s website to solicit sales from in-state consumers.
Click-through nexus can look like this:
- Business A has physical nexus in Arkansas
- Business B has physical nexus in Louisiana
- Business A advertises its products on the website of Business B
- Every time a user clicks on the advertisement link and orders a product from Business A, Business B receives 5% of every sale
In this example, the state of Louisiana views Business B as a “salesperson” for Business A — and therefore Business A now has established nexus within the state.
Vermont explains its own click-through nexus law through this example:
“A Vermont resident is an author with her own website. On her website she sells her books through an online seller and displays a link to the company’s website, establishing click through nexus. The customer is able to “click through” to the website and purchase the book, which is subject to sales tax in Vermont. If the seller has sold more than $10,000 in taxable sales to customers in Vermont, the seller must collect the tax and remit it to the Vermont Department of Taxes.”
Not every state has click-through nexus laws, while some states (like Ohio) have even repealed former click-through nexus laws. This is in favor of the newest kid on the tax block: economic nexus.
>> Economic Nexus
Click-through nexus, explained above, predates economic nexus.
A 2018 Supreme Court Case (South Dakota vs. Wayfair) opened the door wide for states to collect sales tax from companies without physical nexus. Enter: economic nexus. Economic nexus exists when businesses reach a certain sales threshold into a state, regardless of whether they have physical presence within its borders.
An out-of-state retailer can establish economic nexus in a state if the seller sales exceed:
- The state’s monetary threshold (ex. $100,000 in sales) or
- The state’s transactional threshold (ex. 200 transactions)
“Beginning July 1, 2019, the Arkansas Legislature will enact Act 822 of the 92nd Legislative Session which requires that online and other remote, out-of-state sellers collect state and local sales and use taxes in those states where the seller does not have a physical presence but where they sell and deliver their products and services. All remote sellers and marketplace facilitators are required to collect and remit Sales and Use tax to the State of Arkansas if within the current or previous year the sale of tangible personal property, taxable services, a digital code, or specified digital products for delivery into Arkansas exceeded one hundred thousand dollars ($100,000) or two hundred (200) transactions.”
Almost every other state has similar laws in place, with varying thresholds establishing economic nexus. These laws are constantly being updated.
What are the penalties for noncompliance?
If you are selected for an audit and found out of compliance, you’ll owe back taxes, plus penalties and interest. That’s why it’s important to regularly assess your company’s nexus in all states and jurisdictions.
How can you stay tax compliant by determining your company’s nexus footprint?
If determining sales tax nexus seems confusing, you’re not alone. States regularly pass — and repeal — laws to capture tax on sales made to residents within their state.
So how can you determine your company’s true nexus footprint?
Though not a legal requirement, a nexus study — performed by a CPA firm with knowledge of multistate taxation — can help businesses understand their tax obligations in various jurisdictions.
During a nexus study, your CPA will collect information about your online and in-person activities in all 50 states. From this, you’ll receive a report explaining current tax laws and your exposure in each taxing jurisdiction. Because tax laws change constantly, we recommend performing nexus studies annually or every other year.
At Landmark CPAs, we perform nexus studies for companies located across the United States. Get in touch with us to determine your business’s nexus.