What is Nexus?
Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state. Nexus is required before a taxing jurisdiction can impose its taxes on an entity.
Nexus is created if your company maintains a temporary or permanent presence of people (employees, service people or independent sales/service agents) or property (inventory, offices, warehouses). The temporary presence is created through traveling people visiting states to call on customers or prospects, trade show attendance, or consigned inventory in warehouses.
Nexus is created once a substantial physical presence is established. Unfortunately, this is not clearly defined by each state and can vary from 1 day to a number of days in other states. The number of days that can create nexus can also vary based on the activity performed in the state. Nexus means a business entity has established a direct or representational presence within a particular state or jurisdiction. This presence gives the state the right to require a company to pay or collect and remit certain taxes.
Nexus determination is controlled by the U.S. Constitution under the Due Process Clause and the Commerce Clause. The Due Process Clause requires a definite link or minimum connection between the state and the person, property or transaction it seeks to tax. However, the Commerce Clause requires a higher level of connection. The Commerce Clause requires a substantial presence in a taxing state by the entity the state desires to tax.
The United States Supreme Court along with various state level courts has shaped the interpretation of nexus over the history of the sales tax.
Today, most states define nexus under their definition of a retailer engaged in business as “maintaining, occupying, or using permanently or temporarily, directly or indirectly or through a subsidiary, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.” The definitions also include activities by individuals including, “having a representative, agent, salesman, canvasser, or solicitor operating in this state under the authority of the retailer or its subsidiary on a temporary or permanent basis.”
There are two specific types of nexus that apply to remote sellers making sales into other states. These are called “click-through nexus” and “affiliate nexus.” With the onset of online retailers, many states have passed “click-through nexus” and “affiliate nexus” legislation in an effort to impose sales tax on sales made by online retailers. These types of legislation vary by state but often have typical attributes.
Click-Through nexus legislation typically requires that a remote seller meets a minimum sales threshold in the state in question resulting from activities of an in-state referral agent. The seller must be making commission payments to the in-state resident for any orders that come about as a result of the click-through referral from the resident’s website.
Affiliate nexus legislation typically requires that a remote retailer holds a substantial interest in, or is owned by, an in-state retailer and the retailer sells the same or a substantially similar line of products under the same or a similar business name, or the in-state facility/employee is used to advertise, promote, or facilitate sales to an in-state consumer. The legislation may not always require common ownership. And it may include activities related to sales, delivery, service and maintaining a place of business in the state on behalf of the out of state business to benefit the out of state business’ customers.
The Multistate Tax Commission (MTC) had negotiated a special deal for online sellers that may have sales and income tax obligations from previous unpaid taxes in 25 different states. The MTC put together a special amnesty initiative program for online sellers that ran from August 17, 2017 to November 1, 2017. The program is now over. If you didn’t take advantage of the program but realize you need to evaluate your activities, you can contact us here.
Looking for more information on nexus? Check out the following resources:
- Learn about nexus in our online Introduction, Definitions and Nexus course.
- Download our 5 Things to Understand about Your Nexus Footprint whitepaper.
- Visit our Remote Seller Nexus Chart to see which states have enacted remote seller nexus legislation.
- Learn about nexus and other important concepts with our Sales Tax 101 webinar on-demand.
- Find up-to-date news items on nexus in our News & Tips section.