Understanding Sales Tax Nexus

Many companies are not aware that tax regulations in each state may obligate them to collect and pay sales & use tax even when they do not have a physical presence there. Determining sales tax nexus is a tricky proposition, and there are many moving parts to monitor. In this article, TaxConnex shares how sales tax nexus is determined and offers suggestions to help companies meet their obligations under the law.

What is Sales Tax Nexus?

Nexus is the connection a business has with a state or taxing jurisdiction. If there is no connection between the jurisdiction and the company, the business is not required to adhere to the jurisdiction’s sales tax rules.

Physical presence was previously the only consideration where sales tax nexus is concerned. A physical presence can be created by an office or warehouse location, but also by employees, travelling for meetings or conferences, or even employing third party contractors in a state.  Historically, Amazon conducted business solely from its home state of Washington.  Initially, Washington was the only state where Amazon was required to collect and remit sales tax.  As the business grew and developed, regional distribution centers were opened in most states. Amazon’s nationwide physical presence today means they are responsible for collecting and remitting sales tax in every state.

The physical presence standard has been upheld by the US Supreme Court on two separate occasions.  First in 1967 in the National Bellas Hess case and again in 1992 with the Quill case.

Special Types of Physical Presence For Determining Nexus

Moving forward from 1992 into the early 2000s, states started to see a decline in their sales tax collections as a result of buying patterns shifting to the internet.  As a result, states started to stretch the boundaries regarding what defines a physical presence.

Certain states enacted their own nexus requirements based on updated ways of doing business. Click-through nexus was introduced and was established in response to in-state businesses referring customers to out-of-state businesses’ websites to purchase items in exchange for a commission.  Interestingly click-through nexus was first introduced in New York in response to Amazon selling into the state and not collecting sales tax. States with a click-through nexus laws include Arkansas, California, Kansas, Louisiana, Minnesota, Pennsylvania, and Rhode Island.

In 2017, Massachusetts enacted a special sales tax rule called Cookie Nexus. The “cookie nexus” required companies that sell over $500,000 worth of goods or services and conduct 100 separate transactions to collect and remit Massachusetts sales tax if the company placed an Internet tracking “cookie” on the customer’s computers.

States Introduce Economic Presence

Over the past several years, states have begun to impose sales tax regulations on businesses based on additional criteria. The 2018 Supreme Court case South Dakota v. Wayfair is regarded as groundbreaking litigation related to sales tax nexus. It established economic nexus standards in addition to physical presence.

The state of South Dakota believed that it was entitled to sales tax revenues from Wayfair (and other internet businesses), a home decor business domiciled in Massachusetts. Overall, South Dakota estimated that it lost as much as $48 to $58 million annually in sales tax because out of state businesses who lacked a physical presence in South Dakota were not obligated to collect and remit the sales tax. In response, the state legislature enacted a law stating that retailers located in other jurisdictions, even if they have no physical presence in the state, must collect and remit South Dakota sales tax if their sales meet certain minimum criteria.  South Dakota’s legislation defines these minimum criteria as greater than $100,000 in sales or more than 200 individual transactions in the previous or current calendar year.

Once this decision was upheld by the US Supreme Court other states enacted economic nexus laws of their own. Many states go by the $100,000 or 200 transactions requirements, but rules can vary by state, which makes it quite difficult to manage.  

What Obligations Does a Company Have Regarding Sales Tax Nexus?

Once a company has established nexus in a state, it is responsible for collecting sales and use taxes in that given state. It must calculate and charge sales tax to all applicable customers in that state, regardless of how the product was sold or shipped. Once you’ve registered in your required states you must file and remit the collected sales tax.

In addition to various state and local returns and the various level of detail required on each return, there are other factors to consider when setting up a process to become compliant within your business.

Maintain a Tax Calendar. It’s critical to maintain an accurate tax calendar that reflects where a business is registered for sales tax purposes, the filing frequency of each return, the e-file login credentials, and other state-specific information.  Unfortunately, the tax calendar is not a one and done task. Things are changing regularly and need to be updated over time, your filing frequencies may change, or you may be required to register in new jurisdictions. Even if you outsource the return preparation and filing, depending on the vendor, it is often the responsibility of the business to keep this calendar updated.

Prepare for filing. A sales tax compliance process should include the ability to prepare and file both online returns and paper returns. States and local jurisdictions often require different ways to file and submit payment. Some businesses may struggle with the internal deadlines to have checks or payments authorized in a timely fashion.  Unfortunately, the jurisdictions will not adjust their due dates based on internal limitations.

Handle Notices. Jurisdictions enjoy sending notices. But jurisdictions do not always post notices the same way. Some are mailed, and some could be added to a taxpayer’s e-file site, and a notice is not something you want to miss. Some of these notices may be informational but still critical.  For example, a jurisdiction may send a notice of a change in filing frequency from quarterly to monthly.  Missing this change and skipping two monthly returns will result in a penalty. 

Conclusion

The sales and use tax landscape is full of unexpected pitfalls. Most companies want to do the right thing but often don’t know how or where to start.

TaxConnex helps businesses selling into multiple states understand their nexus requirements and establish a sales tax compliance process. When you work with TaxConnex, sales tax is all on us. Contact us for questions on sales tax nexus, or to start your journey to being sales tax compliant.

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