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What is sales tax nexus?

In short, sales tax nexus is a seller’s connection to a state created by certain business activities. These activities might be holding inventory in a state or exceeding a sales threshold into a state. The specific business activities that create sales tax nexus depend on each state’s sales tax nexus laws.

Sales tax nexus is established by certain business activities.

The different business activities that establish sales tax nexus vary by state. Here are some general examples.

Businesses with offices or retail locations located in a state must obtain a sales tax permit. Offices can include employees who work from home, remotely. It can also include independent contractors who perform work on behalf of the business in the state. Other types of employees include owners, partners, or corporate officers who reside and perform company duties in the state.

Inventories stored within a state, also creates nexus through physical presence. This includes inventories that are stored within a fulfillment center. This is true even if the fulfillment center is operated by a marketplace facilitator.

Economic nexus is a seller’s connection to a state based on their volume of sales into the state. A business with high sales volume would be affected by this type of nexus.

The exact thresholds vary by state. The sales are based upon orders delivered to customers within the state. The volume is based on either a dollar amount of sales, number of transactions, or both. Tax nexus in a state is created when such a threshold is exceeded.

Sales tax nexus can also be established when salespeople attend trade shows within various states. In some instances, sales made at trade shows would only be taxable, and not all orders shipped into the state. In other instances all orders shipped into the state may become taxable, usually if a certain threshold is met. Each state has different laws on the taxability of trade show sales.

Some seller platforms are now required to collect and remit sales tax on behalf of sellers. These platforms are known as marketplace facilitators.

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