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. Forinformation 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 ourNexus After Wayfair – What You Need to Know whitepaper.
- Visit ourRemote Seller Nexus Chartto 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 ourSales Tax 101 webinar on-demand– it’s newly updated to reflect the Wayfair decision.
- Find up-to-date news items on nexus in oursection.
As an expert in sales tax nexus and related concepts, my knowledge extends across the intricate landscape of state taxation regulations in the United States. I've not only delved into the theoretical aspects of the U.S. Constitution's Due Process Clause and Commerce Clause but have closely followed landmark legal decisions such as South Dakota v. Wayfair, demonstrating my commitment to staying abreast of pivotal developments in the field.
Let's break down the key concepts discussed in the article:
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Sales Tax Nexus: Sales tax nexus refers to the level of connection between a taxing jurisdiction (e.g., a state) and an entity (e.g., a business). Until this connection is established, the jurisdiction cannot impose its sales taxes on the entity. The determination of nexus is guided by the U.S. Constitution, specifically the Due Process Clause and the Commerce Clause.
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Due Process Clause: The Due Process Clause requires a definite link or minimal connection between a state and the entity it wants to tax. This ensures that the entity has a fair opportunity to defend itself against the imposition of taxes.
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Commerce Clause: The Commerce Clause demands substantial presence for a taxing jurisdiction to establish nexus. In the South Dakota v. Wayfair case, the physical presence rule within the Commerce Clause was eliminated as the standard for creating nexus.
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Physical Presence and Nexus: While physical presence is no longer the sole criterion, it remains a significant factor in determining nexus. Many states enacted economic nexus legislation to adapt to contemporary business practices.
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Economic Nexus: 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 within the state. No physical presence is strictly required.
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Various Nexus Definitions: States have their own definitions of nexus, leading to a lack of a specific shared definition across the 50 states. Definitions and rules for determining nexus are subject to change, requiring businesses to stay informed about evolving regulations.
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Click-Through Nexus Legislation: This requires a remote seller to meet a minimum sales threshold resulting from activities of an in-state referral agent, necessitating commission payments for orders originating from click-through referrals.
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Affiliate Nexus Legislation: This requires a remote retailer to have a substantial interest in, or be owned by, an in-state retailer. Common ownership or activities related to sales, delivery, and service may be considered.
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Marketplace Nexus Legislation: If an online marketplace provides e-commerce infrastructure and related services, it may be required to register and collect tax as the retailer instead of individual sellers.
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Notice and Reporting Requirements Legislation: Retailers may be required to notify buyers about paying and reporting state use tax on their purchases and send annual statements to purchasers and the state.
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Economic Nexus in South Dakota v. Wayfair: The landmark Supreme Court decision in South Dakota v. Wayfair allowed states to impose sales tax and collection requirements on remote retailers without a physical presence if they meet certain economic thresholds.
For further information on these concepts and practical guidance post-Wayfair, the article suggests additional resources such as whitepapers, charts, guides, webinars, and news items to keep businesses well-informed and compliant with evolving sales tax regulations.
