Sales tax used to be a simpler topic: before 2018, the rules on nexus were fairly straightforward. Today, nexus is a much more complicated topic and the definition of nexus has been expanded.
Let’s talk about the different types of nexus.
- Physical Nexus – This is generally easy to determine; physical nexus occurs when a business has a physical presence in a given state. Most business owners understand that this includes physical structures, such as a retail location, office, or warehouse/distribution center. However, physical nexus can be created when a few other conditions are met. During the past year, many businesses had employees working remotely a short distance across a state line from the business central location. An employee located in a state without other physical presence can create physical nexus. This also applies to when a business hires a person located in another state, such as a remote sales person or customer service technician who does not ever need to come to the business central location. So, even if the business has sales in that location that fall under the threshold for creating economic nexus, these remote employees might create physical nexus, based on varying state regulations.
- Economic Nexus –This generally occurs when a business reaches a specified sales or revenue threshold; each state is different and sets this threshold for itself. Each state has written laws that define economic nexus. When a seller reaches economic nexus they must then apply to collect sales tax in the state, and ultimately collect and pay sales tax in that state according to the laws of that state. While all of the states can and have made their own rules about when economic nexus comes into play, the majority of what we have seen is 100K in gross revenue or 100 transactions. Some states use both, some place the threshold at either one or the other, and some have set the thresholds at different values.
- Other Forms of Nexus – Additional ways of creating nexus have arisen from online transactions. Click-thorough nexus can be established via a direct connection between a buyer and seller, such as when a business within a state is paid commissions for referring sales to an out-of-state vendor. Affiliate nexus pertains to affiliates who are independent businesses that sell through another business, such as the Amazon Affiliate program. The affiliate is not an employee or contractor, but is actively associated with a business. This type of nexus may require a commission for referrals be paid by the affiliate.
Determining if your business must collect sales tax when doing business in states other than the one where you have established physical nexus is complicated. Each state writes its own laws that businesses must follow with regard to whether they are required to collect these taxes. Some states not only require collection of state tax, but collection for local jurisdictions and special districts as well. The first thing a business must determine is whether they have nexus in a particular state.
Once it has been determined the economic nexus exists, the business must know if they have met additional conditions that will determine when they must begin paying state sales taxes.
- Threshold – This is the dollar amount or number of transactions that triggers the requirement for a business to begin collecting sales tax. Some states use either a dollar amount or number of transactions; some states use both.
- Sales/Transactions – All states include goods sold when calculating this value, whether the number of transactions or the dollar value of sales. In some states, nexus is triggered ONLY by the dollar value of sales. Other states require a trigger from BOTH dollar value of sales AND number of transactions.
- Retail Sales/Services – Most states collect sales tax on both retail sales and services delivered into that state once nexus has been established. However, there are 11 states that do not include services when determining the dollar amount or number of transactions.
- States With No Sales Tax – There are actually five states that do not charge sales tax. These include Alaska, Delaware, Montana, New Hampshire, and Oregon. Of special note is the state of Alaska; while they do not impose a statewide sales tax, they do allow home rule for local sales tax; some cities enforce economic nexus for local sales tax.
- Home Rule – This refers to cities, counties, or other local governments that have the authority to administer and establish their own sales tax rates and rules. As one might imagine, this arrangement, having possibly hundreds, or even thousands, of different rates in a single state, could become a nightmare for the person having to collect and remit taxes in a particular state.
Some of the states have banded together to create rules that simplify the collection and payment of sales taxes due from remote sellers.
- Simplified Sellers Use Tax Program – Some states have begun to enact legislation that will help simplify tax collection and remittance. Alabama has a law in place that lets remote sellers pay a flat 8 percent tax on sales once economic nexus has been established. Additional states are expected to enact similar legislation in the coming years. Additionally, states such as Arizona have amended their tax laws so that remote sellers can remit taxes to a central collecting agency, rather than pay them to individual home rule jurisdictions. Louisiana has done this as well and others are expected to follow.
- Streamlined Sales and Use Tax Agreement – Given that once nexus has been established in a state, the seller has to pay state and local (home rule) taxes on purchases made in that state. Several years ago, a number of states created the agreement to simplify state sales tax collection. The agreement includes common sales tax-related definitions and rules, along with simplified rate structures, as a way to reduce the burden on small remote sellers. At present, 44 states, the District of Columbia, and numerous localities are members of this collective.