Published on: 06/7/20 6:49 PM
Last modified on: 06/26/20 8:08 PM
In this blog post, we will discuss sales tax nexus – what it is, and how it affects business. In 2018, the U.S. Supreme Court decided the landmark case, South Dakota v Wayfair, Inc. As a result, Quill v North Dakota (1992) was overturned. Before, businesses needed a physical presence to collect sales tax from customers. Now, states can require businesses to register even if there is no physical presence. In short, sales tax nexus is the threshold set by the state that requires businesses to collect sales tax. An important note: When you establish nexus on one sales platform, you establish nexus across all sales platforms.
The authority of states over businesses with a physical presence has not changed. 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. Employees can also include owners, partners, or corporate officers who reside and perform company duties in the state.
Inventories stored within a state, also create a 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.
A marketplace facilitator is a business that offers to facilitate the entire sales process for another business – from listing the product, to storing the product, to charging the customers credit card, to fulfilling orders, and handling customer service requests. Amazon.com and eBay.com are two marketplaces.
Many states have enacted “marketplace facilitator laws” which require the marketplace to collect sales tax on orders they process. This relieves businesses who may have established physical nexus through storing of inventory, from the responsibility of collecting. However, not all marketplaces are required to collect sales tax as they may not meet the requirements set for an individual state.
Again, if nexus is established on one sales platform, it is established across all sales platforms. So, if you establish nexus because you have physical presence through storing inventory in the state, and you use three marketplace platforms, but only two are required to collect because they are marketplace facilitators, you’re required to collect & remit sales tax on transactions occurring on the third platform.
As a direct result of South Dakota v Wayfair Inc., most states have enacted “economic nexus” laws which require businesses without physical nexus to register. They vary by state, but usually the requirement to register occurs when the business reaches either a dollar amount of sales or number of transactions, or both. The sales are based upon orders delivered to customers within the state. Businesses that currently have offices or warehouses in a few states, but ship to customers all over the country will be affected by these laws.
Affiliate nexus is created when a one business has a connection to another business that currently operates within the state. This connection usually requires the business that is not operating within the state to collect and remit sales tax from its in-state customers.
Some examples include selling a similar line of products into a state that has a similar business name. A business (or business) who uses in-state employees or facilities to advertise or facilitate sales. Maintaining an office, distribution facility, or warehouse to facilitate delivery of customer goods. Using an affiliate to deliver, install, or assemble goods.
Sales tax nexus can also be established when salespeople attend trade shows within various states. However, there is usually a threshold to meet before the business would be required to register and collect for all orders shipped into the state. In some instances, sales made at trade shows would only be taxable, and not all orders shipped into the state.
Use our Nexus Determination Service for $99 which examines all aspect of your business to determine whether there is a requirement to register, collect & remit sales tax in each state.