In our Sales Tax 101 post, we covered the what, why and how of sales tax. In Sales Tax 201, we covered the steps companies take to collect and pay sales tax. In Sales Tax 301, we covered who is exempt from paying sales tax. In this post, we discuss different types of nexus.
Sales tax nexus determines where sales tax should be collected based on the connection between the transaction and the state. If, based on the state’s laws, nexus is determined, then it is the seller’s or marketplace facilitator’s obligation to collect and remit sales tax. Once nexus is established, be sure to pay attention to that state’s sales tax laws. Sometimes, nexus can continue past when you are no longer connected to that state, meaning you may need to keep paying sales taxes on relevant transactions.
Economic nexus is established based on economic activity. 43 states and Washington, D.C. enforce economic nexus based on the 2018 South Dakota v. Wayfair Supreme Court ruling. In most of these states, no physical presence is required for nexus to be triggered, although you do need to have a significant amount of economic activity, like $100,000 in sales or more than 200 transactions).
Physical nexus is based on the physical presence you have in a state, but it isn’t only triggered by people. Inventory, warehouses, offices, or the location of the sale or service can all trigger physical nexus in certain states.
Remote nexus is established based on where employees are located either as remote workers, a sales force, or to complete the actual work. In some cases, the employee’s work doesn’t even have to be directly related to a sales transaction for nexus to be triggered. Additionally, event or tradeshow attendance can trigger nexus in certain states, depending on how long the event lasts or what the visit’s intention was.
Affiliate nexus is created in certain states based on the affiliations between business entities. Some affiliations include being related to businesses that already have nexus, like through a parent company, and some are based on having shared trademarks, service marks, or trade names.
Advertising nexus is created based on the way you solicit business in different states. In some cases, the type of advertising you do is the potential nexus trigger, like newspaper, magazine, TV, radio, or billboard. In other cases, the ad revenue structure is the potential trigger, so the tax obligation is dependent on whether the sale creates a commission on the ad.
Delivery & Distribution Nexus
Based on the state, if you have your own delivery vehicles, nexus may be triggered. Additionally, nexus can be triggered depending on how you distribute your product. In some cases, drop shipping triggers nexus, and either you or the drop shipper will be obligated to pay those sales taxes. Typically, if you distribute your product through a third-party service like USPS, UPS, FedEx, or DHL, you won’t have to worry about paying sales tax on the distribution.
This summary only scratches the surface of the complex rules governing sales tax collection in states. With various nexus connections across the U.S., it’s nearly impossible for retailers to keep up with tax obligations on their own. That’s why we’re here to help. To comply with each state’s tax laws, start with our Nexus Tracker to see where you may have nexus.
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