Businesses who sell over the internet must pay a lot of attention to far-flung economic tax thresholds – almost all states and more than a few localities enforce them now – so it’s easy to overlook a more-obvious tripwire.
The Sales Tax Institute claims that one of the biggest misconceptions in the wake of the Supreme Court’s Wayfair decision is tax-collection requirements triggered by physical nexus (aka “physical presence”) no longer apply. In fact, physical nexus remains the first consideration in whether a retailer is legally bound to collect and remit states’ taxes.
With “economic nexus” that many states adopted in the wake of Wayfair, tax obligations kick in after a business tops a set level of sales in terms of quantity or dollar amounts, or both. Physical presence nexus means a business has a direct connection to a state; that connection allows the state or locality to levy sales tax on purchases from that business and imposes requirements to collect and remit taxes. Often physical presence itself – when a business operates out of a brick-and-mortar location in a tax jurisdiction, for instance – creates nexus.
Clear enough. Except that other activities can create physical nexus, activities many companies engage in yet probably don’t think constitute a physical presence. Examples in a state can include:
- owning or leasing just one office or having a mailing address;
- having an employee or independent contractor;
- storing inventory or maintaining a warehouse (including goods sold through big online businesses such as Amazon);
- having an affiliate; or
- doing business only temporarily, such as by attending a trade show or using sales reps.
States are aggressively trying to collect sales and use taxes from businesses, and it pays to keep every possible trigger in mind. While the latest news of economic nexus is important to keep up with, make sure you don’t leave out physical nexus – even if you aren’t hitting thresholds you could still qualify for nexus based on physical standards.
Contact us to learn about the latest developments in sales-tax nexus and what they mean to you and your company.