Sales and use tax obligations are determined by your nexus within a state or jurisdiction. Sales and use tax nexus is defined as the connection between a person or entity and a taxing jurisdiction. It is the basis for all your sales tax decisions because without sales tax nexus, you have no further sales tax obligation to a state.
Prior to 2018, when the Supreme Court Case South Dakota v. Wayfair enacted economic nexus, physical presence reigned supreme when it came to determining a business’ sales tax obligation. For over 50 years, a physical presence was the determining factor for whether a business had a connection to a taxing jurisdiction and today, it is still one of the main ways to determine nexus.
Many people believe that economic nexus replaced physical presence, but that is not the case, it is instead additive. So we can’t forget about physical presence when examining our nexus footprint.
What defines a physical presence exactly? Is it only your physical office location? That is one of the factors, but only one of many. Use the below checklist as a guide to determining if you have a physical presence within a state.
States can assert sales tax nexus on your business if:
- You have a physical office/location.
- Employees are working out of their homes or a separate location outside of your home state. (Some states have made exceptions due to work-from-home requirements specifically related to the pandemic.)
- Inventory or parts are stored in a warehouse. (This includes consigned inventory in 3rd-party logistics warehouses including Amazon.)
- Sales reps have visited or conducted meetings in a state.
- You’ve exhibited at tradeshows.
- You utilize local contractors to perform services on your behalf such as installation or repair services for customers in a state.
- Company owned delivery vehicles are utilized for transporting your product. (This does not include standard mail delivery services such as UPS, FedEx, USPS, etc.)
- Downloadable software where you maintain ownership of the licensed software.
Physical presence is definitely more than your office location and can be more confusing than one would expect. And now – it’s just the beginning – if you don’t have a physical presence, remember your sales into a state could also create an economic presence.
Determining your sales tax obligation isn’t a simple task and is not static. As your business grows, or as laws change, your sales tax obligation can evolve as well. If you’re looking to get a better grasp on your sales tax obligations, talk to a sales tax expert. TaxConnex provides nexus and taxability reviews as well as on-going compliance services. When you work with TaxConnex, sales tax is all on us. Get in touch to learn more about what we can do for your business.