Nexus may sound intimidating or scientific. You may even panic like my friend Kramer: https://www.youtube.com/watch?v=gqcLcXPL3S0
Nexus is not an overly complex idea. It simply means a connection, link, or association with something or someone. A high-level example is as follows: “The nexus between money and politics is very strong and apparent to anyone who reads the news.”
Similarly, nexus in sales tax has the same connotation in a very direct manner: “What relationship does a seller have with a particular state?” Pointedly, if you have nexus in a state, that means
you have a presence in the state and must follow the rules of collecting sales tax in said state. In this article, we will discuss the types of nexus and how that can apply to a business.
As we learned in article number one, each state defines sales tax differently. Similarly, nexus types, definitions, and thresholds vary by each state. We will look to simplify into a few categories:
The company’s physical presence is the classic trigger for nexus and been the historical standard for sales tax. A practical example is that if you have an office location in Atlanta, then you will have physical nexus in the state of Georgia. Thus, for any sale in Georgia, you will have to bill, collect, and remit sales tax to their Department of Revenue.
Over time, as the work force and technology shifted, the definition of ‘physical’ expanded beyond real estate/office locations. Employee activity may likely trigger a physical nexus. If headquarters are in Georgia, but you have remote, permanent employees in California, it is virtually guaranteed that you have nexus in California.
The scope for physical definition can be further, far-reaching as well. For instance, a trade show may create a physical nexus definition (in about 20 states) for a seller. If the trade show is big enough, the state may have auditors review an online list of vendors that attended the event. The auditor may attend the event as well as the trade show may very well become a gold mine of revenue for the state.
An economic threshold may seem abstract, but with technology, efficient delivery chains, and relative ease of delivery, interstate sales are commonplace. Selling a product to a person a mile away compared to a state that is thousands of miles away may logistically be identical.
In a landmark decision, Wayfair vs. South Dakota (2018), the Supreme Court of the United States concluded that states were entitled to collecting sales tax for sales that originated out-of-state. The decision allowed for new revenue streams for many states… and more bureaucracy for businesses.
The general rule of thumb is if a seller has more than $100,000 in annual sales, an economic nexus exists. The seller must evaluate if their good or service is taxable in that state. The seller must follow the rules to register in the state, but also act as an in-state seller would, reporting and remitting pursuant to the statutes set forth by the state’s Department of Revenue.
Each state establishes their safe harbor threshold. Rather, if you sell below a certain level, then you do not have to collect sales tax and are otherwise ‘safe.’ Larger states (e.g., California) establish a higher threshold, while some states (Kansas) do not have thresholds at all.
In 2008, states expanded their scope to include relationships or affiliations in the definition of nexus. Affiliate relationships (contractors or non-employees) to sell, advertise or otherwise promote the seller’s brand or operations, can trigger nexus in over 30 states.
Click-Thru are similar but are more focused on the transaction. A representative may solicit, refer, or otherwise facilitate a sale via the internet on behalf of the business. In return, the representative receives a commission or comparable reward. Over 20 states have click-thru nexus standards, with a low sales threshold ($10,000) and is often measured on a rolling twelve-month period (as opposed to a fiscal year reporting period).
In summary, nexus is an easy concept, has long-reaching tentacles. Evaluating nexus requires a thorough understanding of the business and its people while understanding the specific rules in each state of operations.
In our next article, we will discuss about what to do if you have nexus.
I am Aaron Jaeger, leader of Credo’s CFO practice, CredoCFO. My approach is to work as an extension of your executive team to help you meet distinct goals and create—as we say at Credo—Results That Matter.
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