Some new business owners operating exclusively online labor under the mistaken assumption that unless they've sold a product or service to someone in the state in which their business is physically located, they are not responsible for collecting and paying sales or use tax. Unfortunately, this is not necessarily the case. A variety of scenarios can legally obligate an online retailer or service provider to collect and pay sales tax in any number of states.

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"Sales tax nexus" is defined as a business' relationship to a governmental jurisdiction that requires collection and payment of sales and use taxes. Nexus refers to the physical or economic presence (or lack thereof) of a business in a given jurisdiction. In the past, determining sales tax nexus was rarely problematic. You either operated your business (e.g., had a store front) in a given state or you didn't.

The advent of the internet and the ubiquity of ecommerce has made nexus determination considerably more complex. The convoluted web of sate laws surrounding this issue are especially relevant for businesses that use affiliate and/or "click through" marketing strategies. 

Though states must answer to Constitutional and federal statutory limitations on their ability to exercise their tax imposition powers, the manner in which different states have handled this thorny issue varies widely. Guidance from the American Association of Certified Public Accountants offers the following rule-of-thumb as a starting place for determining whether you may have established nexus:

. . . entities generally will have nexus in states in which the entity has production activities, offices, facilities, employees, and tangible property, and potentially will have nexus in states in which the entities have a significant market.

Determining whether you've established nexus in a jurisdiction can be a daunting process.  To ensure that you've complied with laws related to the establishment of sales tax nexus, the best move is to secure professional guidance.  At Taxconnex, our professionals have the training and experience to expertly guide you through the nexus determination process so you can rest easy knowing that you've got all your bases covered.  

Brian Greer

Written by Brian Greer