What exactly is sales tax nexus?  Tax nexus is a legal term, that when present, gives a state the ability to subject a business to that state's sales tax laws.  According to Investopedia, tax nexus is "generally defined as a physical presence." However, contrary to the nomenclature, a physical presence does not actually have to entail what one would think it means. A physical presence could include more than just having an office or employees in the state.  For example, visiting a state to check up on clients and maintain business relationships can create sales tax nexus. Quill Corp vs. North Dakota (1992) brought forth the physical presence standard, but in the ensuing decades individual states have incorporated the law in a confusing, varying fashion - especially as it relates to online sellers.

In the past ten years, states have taken steps to potentially capture lost sales tax collections by enacting new and confusing legislation.  For example, click-through nexus, economic nexus standards, reporting requirements, and most recently Minnesota has enacted legislation that could require the online marketplace to collect sales tax on behalf of their e-tailers.

Many of these laws and regulations are being, or will be, challenged in the courts as they directly contradict the Quill case.  But until the courts decide, the seller is left in a precarious position.  Do they comply with the rules that may be unconstitutional and incur the expense of compliance?  Or do they ignore the rules for now, with the expectation that they will be overturned, but increase their risk of non-compliance?

At TaxConnex, we help businesses sort through these various risk factors and determine the appropriate sales tax compliance process for their business.  We'd be happy to speak with you if you have questions.

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Brian Greer

Written by Brian Greer