What is Nexus?
Sales tax nexus defines the level of connection between a taxing jurisdiction such as a state and an entity such as your business.
Until this connection is established, the taxing jurisdiction cannot impose its sales taxes on you.
Nexus determination is primarily controlled by the U.S. Constitution, in which the Due Process Clause requires a definite link or minimal connection between a state and the entity it wants to tax, and the Commerce Clause requires substantial presence.
In South Dakota v. Wayfair, the Court eliminated the physical presence rule within the Commerce Clause as the standard for creating nexus in a jurisdiction. However, physical presence will still create nexus and is the first consideration in determining nexus. In the lead up to the Court’s decision, many states enacted new types of economic nexus legislation to address how sellers conduct business today.
There is no specific shared definition of nexus across the 50 states. Moreover, definitions and rules for determining nexus change constantly, and most states are careful to give themselves room to maneuver in their definitions. This means that a business must look at each state individually when determining sales tax nexus and must stay constantly on top of a slew of changing regulations and interpretations.
Here are a few representative definitions of Nexus that most states would more or less agree with. As you read them, you can almost feel the steel jaws starting to clamp around you:
- “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.”
- “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.”
- “Any seller which does not have a physical presence in this state shall remit sales or use tax, if the seller meets either: 1. Gross sales from the sale of taxable items delivered in this state exceed $100,000; or 2. The seller sold taxable items for delivery in this state in 200 or more separate transactions”
Other states may set their own economic nexus threshold, but it must prove to not impede on nor create an undue burden on interstate commerce. South Dakota v. Wayfair established what would be considered acceptable to the Federal courts as being constitutional. Therefore, a majority of states have set the $100,000 in sales or 200 separate transactions as their threshold. These definitions—which focus around having a business presence in a state—are just starting points for determining nexus.
There are innumerable details, timescales, vagaries, and state-by-state idiosyncrasies involved. The point is, if you have knowingly or unknowingly created nexus in a state, then you are subject to some very strict obligations.
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 not 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.
Marketplace Nexus legislation typically means that if an online marketplace operates its business in a state and provides e-commerce infrastructure as well as customer service, payment processing services and marketing, the marketplace facilitator is required to register and collect tax as the retailer rather than the individual sellers. This could also impose reporting requirements on the marketplace facilitator.
Notice and Reporting Requirements legislation typically requires that a retailer must notify buyers that they must pay and report state use tax on their purchases. The retailer may be required to send purchasers and the state an annual statement of all of their purchases from the retailer.
Economic Nexus legislation generally requires an out-of-state retailer to collect and remit sales tax once the retailer meets a set level of sales transactions or gross receipts activity (a threshold) within the state. No physical presence is required.
Economic nexus was a central issue in the United States Supreme Court case, South Dakota v. Wayfair. On June 21, 2018, the U.S. Supreme Court ruled in favor of South Dakota and overruled the traditional physical presence rule as a necessary requirement to impose sales tax and collection requirements on a remote retailer. This was the first Supreme Court decision on nexus since 1992. States now have the right to require tax collection from online retailers and other remote retailers with no physical presence in their state if they meet certain economic thresholds.
To learn more about the South Dakota v. Wayfair decision, read our news item. For a list of resources for remote retailers post-Wayfair decision, visit our Remote Seller Resources page. For information such as effective dates, thresholds, and includable sales for out-of-state sellers making sales into states that have enacted economic nexus legislation, visit our Economic Nexus State Guide.
Looking for more information on nexus? Check out the following resources:
- Download our Nexus After Wayfair – What You Need to Know whitepaper.
- Visit our Remote Seller Nexus Chart to see which states have enacted remote seller nexus legislation.
- Check out our Economic Nexus State Guide for a detailed chart of economic nexus rules across the states following the Wayfair decision.
- Learn about nexus and other important concepts with our Sales Tax 101 webinar on-demand – it’s newly updated to reflect the Wayfair decision.
- Find up-to-date news items on nexus in our News & Tips section.