This blog originally appeared here on Avalara’s blog page.
Nexus laws can impact any business’s tax obligations, so every business should know what nexus is, and what it means to have nexus in a state.
What is Tax Nexus?
Nexus is a connection or link. Tax nexus is a connection between a business and a tax jurisdiction that enables the jurisdiction (e.g., a state, city, or county) to tax the business.
Nexus laws can affect a variety of taxes, including business and occupation (B&O) tax, franchise tax, income tax, and sales and use tax.
What is Sales Tax Nexus?
Sales tax nexus is a connection that creates a sales/use tax obligation. If your business has sales tax nexus with a state, you’re required to obtain a sales tax permit and comply with all applicable sales and use tax requirements.
For the most part, sales tax nexus laws in the United States are governed by states. However, in the handful of states that allow home rule, individual cities and/or counties may impose additional local sales tax nexus requirements.
How is Nexus Triggered?
There are several ways for a business to establish nexus with a state:
- Physical presence in a state (physical presence nexus)
- Economic activity in a state (economic nexus)
- Ties to affiliates in a state (affiliate nexus)
- Referrals from businesses or individuals in a state (click-through nexus)
Physical Presence Nexus
Having a physical presence in a state virtually guarantees sales tax nexus. As the Washington State Department of Revenue explains, “Physical presence is a nexus standard that requires only more than the slightest presence.”
Physical presence nexus can be triggered in a number of ways, including but not limited to:
- Having employees working in the state (including remote employees)
- Having real or tangible property in the state (including inventory in an Amazon warehouse)
- Exhibiting at a trade show in the state
- Making deliveries in the state (other than by mail or common carrier)
Yet exact requirements vary by state. For example, having inventory in a marketplace warehouse generally doesn’t establish physical presence nexus in New York or Texas, but it does create physical presence nexus in California and New Jersey.
Economic activity in a state is now one of the most common ways to trigger nexus, though economic nexus is a relatively recent phenomenon.
On June 21, 2018, the Supreme Court of the United States ruled that physical presence in a state is not requisite for sales tax nexus. The groundbreaking decision in South Dakota v. Wayfair, Inc. didn’t eliminate physical presence nexus, but it freed states to tax out-of-state businesses with no physical presence in the state.
It’s taken years for the dust from the Wayfair decision to settle, but all states with a general sales tax (plus the District of Columbia and Puerto Rico) now have economic nexus laws in effect; Missouri became the last to enforce economic nexus on January 1, 2023.
The only states that don’t have an economic nexus law are the states that have no statewide sales tax: Delaware, Montana, New Hampshire, and Oregon. There’s also no state sales tax in Alaska, but many cities and boroughs in Alaska enforce economic nexus for local sales tax.
All economic nexus laws provide an exception for businesses whose sales in the state are beneath a certain threshold, but that doesn’t mean small businesses don’t need to worry about economic nexus. Small businesses can easily establish economic nexus with one or more states because economic nexus thresholds in many states are relatively low:
- 15 states have a threshold of $100,000 in annual sales
- 25 states (plus D.C. and Puerto Rico) have a threshold of $100,000 in annual sales or 200 transactions annually
Economic nexus thresholds may or may not include exempt transactions or services. For state-specific threshold information, see our state-by-state guide to economic nexus laws.
More than 30 states have affiliate nexus laws, which impose a sales tax obligation on out-of-state businesses with ties to affiliates in the state. To trigger nexus, affiliates must somehow promote the remote retailer’s business, by selling a similar line of products under a similar name, for example, or by distributing advertising materials on behalf of the out-of-state business.
As with economic nexus and physical presence nexus laws, affiliate nexus laws vary by state.
Approximately 15 states have click-through nexus laws requiring remote sellers to register for sales tax if they 1) receive referrals from residents of the state, and 2) make a certain amount of sales from such referrals.
Click-through nexus laws vary from state to state.
Though affiliate and click-through nexus laws don’t make headlines the way economic nexus and physical presence nexus laws do, they shouldn’t be overlooked. After all, Illinois repealed its affiliate nexus and click-through nexus provisions after Wayfair and then reinstated them. If a law is on the books, it can be enforced.
Why Does Sales Tax Nexus Matter for Small Businesses?
Sales tax nexus can affect any business that sells to consumers in other states, even if all your sales are exempt. You may not need to collect and remit sales tax if you only make exempt sales, but you can still be required to register for a sales tax permit, validate exempt transactions, and file returns.
Wayfair was a game changer for businesses because it freed states to tax online sales by out-of-state sellers. The COVID-19 pandemic was also a game changer because it accelerated ecommerce adoption: At the height of the pandemic, according to McKinsey research, the ecommerce industry experienced 10 years’ growth in just 90 days.
More online sales can lead to more economic nexus obligations for small businesses that may have previously been selling under economic nexus thresholds. So while increased sales are exciting, it’s important to be mindful of how they can affect sales tax compliance.
What Should I do About Tax Nexus?
The first step is learning about nexus laws in the states where you make sales and figuring out where you’re required to collect sales tax. States typically have a lot of good information on their department of revenue websites, as the South Carolina Department of Revenue shows.
If you discover you’ve crossed an economic nexus threshold, it’s in your best interest to register sooner rather than later. However, there are some things you’ll need to know before you register. For instance, it’s critical to check that you didn’t establish nexus years ago, unbeknownst to you, because you could end up with a hefty bill for back taxes.
Once registered, you’ll need to calculate and collect sales tax on taxable transactions, validate exempt transactions, and file returns and remit the tax due by the appropriate deadlines.
Tax nexus can impact your business regardless of its size. It may seem intimidating, but with the right information, you can help your business stay tax compliant and ready to grow. Check out these sales tax nexus resources and this sales tax nexus FAQ for more information.
If you have any questions about nexus, please connect with us.
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