There are tons of posts out there about sales tax nexus and economic nexus. The problem is, most are either overly complicated or way too vague.
The main goal of this post is to provide concise answers on what sales tax nexus and economic nexus are, what they do, how they work, and what implications they have on businesses. To accomplish this, we’re going to explain everything you need to know about sales tax in plain English.
Here’s how we’re going to break it down.
- Key Definitions
to help you understand what the heck we're talking about
- Legislation Details
to help you grasp when, why, and how nexus is triggered
- Real-World Examples
to help you understand practical nexus application
To wrap up, we'll provide insight on how to manage, simplify, and streamline sales tax compliance. And last but not least, our robust FAQ section will address and answer the most common nexus questions we get from our clients.
Let’s start with the most basic concept; sales tax nexus.
Jump to Topic
Sales Tax Nexus | Physical Presence Nexus | Economic Nexus
Trailing Nexus | Affiliate Nexus | Click-Through Nexus | 'Cookie' Nexus Marketplace Nexus | Miscellaneous Nexus | Tax Compliance | FAQ
Sales Tax Nexus Defined
Sales tax nexus, often just referred to as nexus, is the minimum connection a business must have with a state in order to be required to collect and remit sales tax in that state.
The term 'sales tax nexus' is quite broad, and it's often used interchangeably to define specific types of nexus (ex; physical, economic), which can be confusing. When you're talking tax, make sure you understand what the term 'sales tax nexus' is referring to in the context of the conversation.
Many things can establish nexus between a business and a state. However, physical presence and economic thresholds are the most common triggers - so we'll start there.
Physical Presence Nexus Defined
Physical presence nexus occurs when a business has a direct connection to a state that allows said state to impose sales tax obligations on the business.
In many cases, physical presence nexus is triggered when a business operates out of a brick and mortar location in a particular state. This situation is very straightforward, but there are also more nuanced physical presence triggers, which we'll explain below.
Physical Presence Nexus Legislation
Having a physical location or brick and mortar business
for example, owning a boutique shop in Manhattan
Owning or leasing a business office in another state
for example, having a store in one state and an office headquarters in another state
Owning or leasing a business warehouse in another state
for example, leasing a centrally located warehouse to store inventory that's distributed to brick and mortar locations
Non-Property-Based Physical Presence Nexus Triggers:
Sending employees or agents to another state
for example, sending traveling sales reps to other states to recruit new business
Storing property in a facility in another state
for example, Fulfillment by Amazon sellers who store inventory in Amazon warehouses (involves property, but not property owned or leased by the business owner)
Real-World Physical Presence Nexus Examples
You've got the definitions down - now let's take a look at physical presence nexus in action.
The Cafe Owner
If you open a cafe in Gilbert, Arizona, the direct physical connection to the state that's created by purchasing or leasing a brick and mortar building triggers physical presence nexus. That means you must collect and remit sales tax to the state of Arizona.
'Home state nexus' is a term used to refer to state tax obligations that occur based on where your primary or flagship brick and mortar business resides.
Now let's say your flagship location is in Arizona, but you have additional locations in Kansas, California, and Texas. Each leased or owned building triggers physical presence nexus, resulting in sales tax obligations in all four states.
The Amazon Seller
If you're a fulfillment by Amazon (FBA) seller, Amazon will choose which warehouses to store your inventory based on product and sales history. You'll have nexus in states where your inventory is stored, in addition to any physical or economic nexus obligations you already have. Product can move frequently, so you need to monitor where your inventory is stored because it's your responsibility to manage nexus compliance.
To find out where your inventory is stored, go to your Inventory Events Report by navigating to Reports > Fulfillment > select ‘more’ under the Inventory header > Inventory Event Detail. When you open it, you'll be able to see a list of states where your inventory is stored.
Report these states to Amazon by going to your Seller Central page and clicking on settings > tax settings. This is where you'll indicate every state you have sales tax nexus in. Once done, Amazon will collect state sales tax on your behalf, but it will still be your responsibility to file and remit tax monies in all states where you have physical or economic nexus.
The Remote Employee
If your company has a home base in California, but you have employees in Arizona and Oregon, do your employees trigger sales tax nexus? This is when we turn to state legislation for guidance because the answer differs from state to state.
In Arizona, the answer is yes if your employee spends two or more days per year in the state. In Montana, however, having a remote employee does not trigger physical presence nexus. That's because Montana is one of five US states that doesn't have sales tax.
The Traveling Salesmen
Let's say you have a Territory Sales Manager who works out of his home in North Carolina. Now, let's say his role is heavily travel-based, and he regularly visits clients across his territory, which includes North Carolina, South Carolina, Tennesee, Kentucky, and Virginia.
Nexus can vary some state to state, but in general, the salesman's presence there, coupled with sales made into the state is likely to establish physical nexus. Other traveling roles, like installers and implementation specialists, can also create nexus in states they visit, depending on state legislation's definition of an 'in-state employee.'
Economic Nexus Defined
Economic nexus is an inter-state sales tax that, at it's simplest, is based on sales volume.
Unlike physical presence nexus, economic nexus requires businesses based out of one state to pay taxes into other states if they meet or exceed a state's economic nexus threshold(s). Economic nexus applies to both brick and mortar retailers and online retailers and resellers.
Collecting tax on ecommerce transactions was not legal until June 2018. States are eager to pass economic nexus legislation because significantly boosts state revenues.
Economic Nexus Legislation
More than 30 states have taken steps to enact or enforce economic thresholds that require out-of-state sellers to register, collect, and remit sales tax - and more are likely to follow. States have the freedom to come up with their own economic threshold definitions, but to date, most structuring regulations very similarly.
Revenue-based economic nexus threshold:
Gross revenue from sales is greater than or equal to $X; typically $10,000 to $500,000.
Transaction-based economic nexus threshold:
Business does X transactions or more per year; typically 100 to 200.
Be Mindful of And vs. Or
Some states require only one of these two thresholds be met to trigger nexus, while others require both be met. Watch legislative language carefully for the words and and or to make sure you comprehend what triggers economic nexus.
Some states base nexus off last year’s sales, others base it off the current year
To date, states have denied the retroactive application of economic nexus laws. That means you only have to register, collect, and remit sales tax for transactions made once you pass a state’s threshold ($ or #), given that the state law’s effective date has already passed.
A Word of Warning
Ever since economic nexus came into the picture in 2018, it's dominated every sales tax conversation. With so much attention on economic nexus, many businesses don't realize that physical presence nexus is still very much relevant in states that collect sales tax from businesses.
Furthermore, businesses often don't realize that physical presence nexus and economic nexus are not mutually exclusive. In fact, it's not only possible; it's probable for businesses with significant annual revenues to have both physical and economic nexus, sometimes in multiple states.
Examples of Economic Nexus in Action
In 99% of cases, it's up to business owners (or their accountants) to manage sales tax compliance.
As a seller, you must:
- evaluate economic thresholds in states where you do business
- determine where thresholds were met or will be met
- register as a seller in each state where have economic nexus
- accurately collect state and local taxes
- file and remit sales tax in those states
If all that sounds too complicated, we can help.
In most cases, determining nexus is a reasonably straightforward process. Review a state's economic threshold criteria and compare it to your sales; if you meet or exceed thresholds, you have nexus.
Naturally, some states make nexus compliance more complicated than others. Enter South Dakota and Washington.
Economic Nexus Example: South Dakota
South Dakota has had a long and sordid history with economic nexus legislation. The short version is, the state put economic nexus legislation into place in 2016, but it was deemed unconstitutional by a South Dakota judicial court. In 2017, the state petitioned the US Supreme Court to hear their case, and the court agreed.
Nearly a year after hearing oral arguments in the landmark South Dakota v. Wayfair case, economic nexus was deemed constitutional. The Court concluded that “the physical presence rule is unsound and incorrect. Modern e-commerce does not align analytically with a test that relies on the sort of physical presence.”
While the matter was settled from a constitutionality standpoint, the Supreme Court put South Dakota under an injunction and turned them back over to the state legislature. Basically, that means the court said don't go skipping back to South Dakota and start collecting money; you've still got some stuff to sort out. The injunction was officially lifted on November 1, 2018, at which time South Dakota was legally able to begin collecting sales tax from inter-state sellers.
With that context in mind, here's how economic nexus plays out in South Dakota.
Economic Nexus Threshold
$100,000 gross revenue from sales into South Dakota or 200 separate transactions with South Dakota buyers in the current or previous calendar year
Sellers who met a threshold in 2017, must get licensed and pay applicable sales taxes for all transactions that occurred in 2018 after the injunction was lifted
Sellers who met a threshold in 2018 after the injunction was lifted must get licensed and pay applicable sales taxes on all transactions that occurred after the threshold was reached and for all 2019 transactions
Sellers who meet a threshold in 2019 must get licensed and pay applicable sales taxes on all transactions that occur after the threshold was reached and for all 2020 transactions
While South Dakota laws are no more complicated than any other state, the injunction delay made nexus compliance more complex for inaugural nexus states who exceeded prior year thresholds.
Economic Nexus Example: Washington
Economic Nexus Threshold
$100,000 in annual retail sales into Washington in the current or previous calendar year (effective October 1, 2018)
Prior to March 14, 2019, remote sellers could also have economic nexus if they had 200 or more transactions in the state. SSB Bill 5581, effective July 1, 2019, eliminated the 200 transaction nexus trigger.
Sellers who met the threshold in the previous year (2018), must start collecting as of January 1 of the current year (2019)
Sellers who meet the threshold in the current year (2019) must begin collecting on the first day of the month at least 30 days after they reach the threshold
From Oct. 1, 2018 to March 13, 2019, businesses who had 200 transactions with Washington customers also met this threshold. However, the 200 transaction criteria was eliminated on March 14, 2019.
Sellers who previously registered because they met the 200 transaction threshold must now assess sales to see if the $100,000 threshold is exceeded.
If it is, sellers must continue to collect and remit tax. If it isn't, Washington trailing nexus law (WAC 458-20-193) requires sellers to continue to collect and file for the remainder of the current calendar year and the entirety of the following calendar year. That means businesses who met the 200 trigger, even if they no longer have nexus based on revenue, have to collect and remit taxes through the end of 2020.
Nexus can last even after the direct connection that triggered it in the first place becomes obsolete. This is called trailing nexus.
If you have a remote employee in Texas, but they leave the company, the state requires that you continue to collect and remit for the remainder of the calendar year.
Trailing nexus laws vary from state to state, and are quite vague in some areas. For example, California's trailing nexus legislation states, “After a retailer ceases activities that had caused it to be a "retailer engaged in business" in this state, … the lingering effects of the retailer's physical presence in this state may continue to generate sales for the retailer for a reasonable period thereafter. So long as the retailer continues to generate sales from the lingering effects of its physical presence in California, the retailer is considered to be engaged in business in this state.” Without end-to-end analytics, it's hard to prove where a sale originated, so do with that what you will.
Less Common Sales Tax Nexus Triggers
Let's examine widely adopted sales tax nexus laws that have made their way into a handful of legislatures across the US, but that have a less frequent impact on business owners.
When a company hires or contracts a third-party entity based in another state to help manage or grow their business in some capacity, it may trigger affiliate nexus. As usual, laws vary by state.
Indirectly using or occupying a physical space (e.g., through a subsidiary or agent) can trigger affiliate nexus in some cases.
Affiliate Nexus can Occur When:
A retailer sells a similar line of products into a state that already has a similar business name or line of products (creating implied competition, even if products are unrelated)
An affiliate person uses in-state employees or in-state facilities to advertise, promote or facilitate sales
An affiliate maintains an office, distribution facility, warehouse or storage place or similar place of business to facilitate the delivery of property or services sold by the person to the person’s consumers;
An affiliate uses trademarks, service marks or trade names that are the same or substantially similar to those used by an in-state business
An affiliate person delivers, installs, assembles or performs maintenance services for purchasers
North Carolina out-of-state sellers with more than $10,000 in annual gross sales from affiliate referrals trigger nexus.
If a seller uses in-state services that direct customers to a business or online store, they can trigger click-through nexus. This can be done through affiliate links, banner ads, or similar.
Pennsylvania triggers nexus for out-of-state sellers who have a contractual relationship with any state entity that has a website with a link encouraging purchasers to place orders.
Put as simply as possible, some states have determined that the transmission and storage of web cookies satisfies the physical presence necessary to trigger sales tax nexus.
Massachusetts law says "the use of in-state software (e.g., ‘apps’) and ancillary data (e.g., ‘cookies’), which are distributed to, or stored on, the computers or other physical communications devices of a vendor's in-state customers, and may enable the vendor's use of such physical devices, constitutes a “physical presence”. This being the case, the publisher of the cookies triggers physical nexus and is required to collect and remit sales tax.
Marketplace nexus is a relatively new concept. Before we dive into what it is, it's important to understand who it applies to.
Marketplace facilitators are online marketplaces (a la Amazon, Walmart, and eBay) that list, collect payment for, and fulfill orders on behalf of a third-party seller. Realizing the burden of tax compliance on small businnesses and independent internet sellers, some states are now requiring marketplace facilitators with high annual sales revenues to register, collect and remit tax and handle reporting on behalf of their individual sellers.
Generally, affected marketplace facilitators must operate in a state and provide not only the ecommerce sales platform, but also customer service, payment processing, and marketing. This is a big win for small ecommerce sellers who have found themselves facing a massive tax burden since economic nexus was deemed constitutional.
California Marketplace Facilitator nexus states, "Beginning October 1, 2019, marketplace facilitators in California must collect and remit sales tax on all sales made through that marketplace if they surpass $500,000. This means both in- and out-of-state marketplace facilitators who meet the $500,000 threshold are now required to collect sales tax made on all sales into the state through the marketplace. Individual marketplace sellers won’t be held responsible for collecting those sales tax."
It's impossible to cover every possible nexus trigger since every state's legislation has its own set of fine print. However, it's good to know that things like advertising, drop shipping, and referrals from in-state businesses can all trigger nexus in certain circumstances.
Sales Tax Compliance Considerations
The term sales tax compliance means to abide by sales tax laws. There are multiple elements involved, including collecting accurate tax, identifying and registering in nexus states, and filing accurate state returns on time.
Since economic nexus came onto the scene, businesses must register, collect, and remit tax in significantly more jurisdictions. This is one of the most significant pain points for online and interstate retailers. As a result, small and mid-sized business are overwhelmed, and rightfully so.
Here's why sales tax compliance is challenging to manage:
There are 10,000+ tax jurisdictions in the US
You must accurately identify which states you have nexus in based on each state's economic threshold
When a new state implements economic nexus laws, businesses must remit taxes in that state if they meet the threshold
You must stay up-to-date on nexus policies, rates and changes for all states you do business in
Each state has its own filing schedule and deadlines, which you must keep track of to avoid late or nonfiling fees
With more states to remit in, more tax rates to keep straight, more policies to monitor, and more tax deadlines to keep track of, many small and medium business owners are turning to sales tax experts for help. Let LumaTax be your sales tax compliance crew.
SALES TAX + NEXUS FAQ
Below, we'll answer some of the most common questions we get about sales tax, nexus, compliance, audits, tax authorities, and more.
What is sales tax compliance?
Sales tax compliance is the act of businesses 1). accurately identifying where they have sales tax nexus, 2). registering for a sellers license in nexus states, 3). collecting sales tax at the appropriate rates, and 4). filing and remitting sales tax according to state filing schedules.
Can businesses have sales tax nexus and economic nexus?
Absolutely! In fact, it's not only possible to have both; it's probable in many cases.
When do you start collecting and remitting sales tax?
Some states specify a start date, but many don't. The widely adopted rule of thumb is that businesses must begin collecting and remitting sales tax immediately once nexus conditions have been met.
With physical nexus, a start date is easy to determine, since the purchase of a building, grand opening of a business, or hire date of an employee dictates nexus being triggered. However, with economic nexus, nailing down a date and being prepared to collect tax right away can be tricky because sales numbers are fluid and sometimes unpredictable. To remain compliant, businesses need to anticipate where they'll trigger nexus, so they're registered and prepared to meet their tax obligations in order to avoid penalties.
When are taxes due?
Every state has its own filing schedule (we know, an unfortunately common answer). Check out our state guides for links to state tax authority sites, where you can find filing date information.
What is the Streamlined Sales Tax Act?
The Streamlined Sales Tax Act, commonly referred to as the SSUTA, was created to help reduce the burden sales tax compliance puts on businesses. The idea is, participating states all share uniform definitions, filing forms, and other universal documents. The problem is, even with umbrella regulations in place, states still have control over details, so the SSUTA only helps to a limited degree.
What protections reduce the burden on small businesses?
The concept of using economic thresholds was born partially out of a desire to help protect small businesses. By setting thresholds, small shops are omitted from having to tackle complex sales tax compliance. Evolving marketplace facilitator legislation that requires large marketplaces to manage compliance on behalf of their sellers should also help reduce small business burdens for ecommerce sellers.
How do businesses register in a state?
Every state has a tax website where companies can register to file taxes in that state. Use our state guides to find the state or states you're looking for.
How do businesses remit taxes?
Most states have online payment portals, but some still use good old fashioned tax forms and checks. In any case, you'll want to make sure you know which states you owe taxes in, register as a seller in all applicable states, and follow instructions on their business tax authority site to file. Use our state guides to find the state or states you're looking for.
Do SaaS companies have to pay sales tax?
Some states collect sales tax on SaaS products. For a comprehensive guide on where SaaS companies must collect and remit tax, check out this post.
Do states charge sale tax on food and beverages?
Groceries are tax exempt in most states, but a handful of states do charge tax on food and beverages. Some states exempt grocery staples, but tax candy, soda, and a handful of other items detailed in tax legislation. Check out this post for a state-by-state guide to food and beverage sales tax.
Who regulates sales tax nexus compliance?
Every state has a department of revenue, department of taxation, or other similar tax authority that manages sales tax compliance. Each division is made up of several departments, including the audit division. When businesses engage in activities that raise red flags, they may capture the attention of their state auditor.
Who manages sales tax compliance for businesses?
Many companies opt to do it themselves. However, there can be lots of benefits to hiring a small business accountant or bringing in third-party experts to help manage sales tax, especially in today's rapidly changing legislative environment.
We hope this guide helped you better understand what sales tax nexus and economic nexus are and how they impact your business. Please don't hesitate to contact us if you have any questions!