Physical nexus gotchas

Economic nexus has grabbed most of the headlines since the landmark Wayfair decision in 2018. Most online businesses probably think first about how much they sell in other states.

But nexus has another way of snagging companies that’s both obvious and subtle: physical presence.

Always been a factor

Sales and use tax obligations are determined by your nexus within a state or tax jurisdiction; nexus is defined as the connection between a person or entity and a taxing jurisdiction. Without sales tax nexus, you have no further sales tax obligation to a state.

Before 2018 opened sesame for states to enforce economic nexus, physical presence reigned in determining a business’s sales tax obligation. Economic nexus hasn’t replaced the obligations of physical nexus, just added to it – your company can have physical nexus without having economic nexus.

What defines “physical presence?” States can also assert sales tax nexus on your business if in a jurisdiction you have: 

• A mailing address or you own or lease just one office or store;
• Employees, affiliates, service personnel, independent contractors or sales representatives;  
• Representatives or exhibits at a trade show;
• Multiple in-person sales meetings or presentations;
• Company-owned delivery vehicles for transporting your product (excluding standard delivery services such as UPS, FedEx, USPS and so on.)
• Downloadable software where you maintain ownership of the licensed software. (Software-as-a-service, or SaaS, presents it own special sales tax wrinkles.)

There are still other ways to establish physical nexus, too.

Remote workers

Recent trends have influenced some potential triggers for physical nexus, such as your employees working out of their homes or a separate location outside of your home state.

Before the pandemic, relatively few companies had to worry about this kind of physical nexus. Now about one in three workers work from home, raising potential sales tax issues for their employers: A remote worker in a state is a common way to establish physical presence nexus.

The potential trap here is distinguishing between nexus for purposes of sales tax and for purposes of state income tax. More and more states are pursuing income taxes on pay earned within their borders regardless of where the employing company is. The burning question is whether states will try to transfer this nexus from one kind of tax to another.

“A company is generally considered to be doing business subject to a state’s tax laws if the company has employees working in the state,” says the consultancy RSM. “Businesses with employees working remotely, if they would have otherwise worked in an office location, could be subject to a state’s tax laws based merely on employees’ presence.”

Your best defense is to keep up to date on the changing nexus tripwires in states where you have remote workers and sales.

Inventory

Storing your saleable goods in a state has always been surefire way to establish physical nexus and most companies understood that.

New trends have again changed the landscape. For example, many companies sell through such marketplace facilitators as Amazon; those facilitators often store sellers’ inventory in warehouses in many states – meaning a lot of unsuspecting merchant companies could find themselves on the hook for sales tax obligations.

Like countless details of sales tax, this nexus trigger itself is also changing. In Pennsylvania, a state court recently decreed that an Amazon warehouse creates no physical nexus or special sales tax obligation for a group of online sellers. The

reasoning: The sellers had limited choice where their inventory was stored and who had no other connections to the state. This decision could well ripple out to affect warehousing and physical nexus in other states.

Nothing stays static in sales tax.

TaxConnex can help your business stay on top of your taxability and ensure you maintain sales tax compliance. Get in touch to learn how we can help you.