State By State Sales Tax Nexus Overview
With the historic 2018 Supreme Court ruling in the South Dakota v. Wayfair case, sales tax compliance has become much more complicated and the risks of non-compliance have compounded. Not only are states pursuing economic nexus, they have become increasingly aggressive in pursuing all types of nexus in order to increase sales tax revenue.
There is no universal definition of nexus across the states, but there are general forms of nexus that states apply. Our Nexus Map shows the current nexus types in each state. Below is a brief explanation of each.
Economic nexus was at the heart of the South Dakota v. Wayfair case. Essentially, the U.S. Supreme Court ruled in favor of South Dakota and held that the traditional physical presence requirement was no longer necessary to impose sales tax collection requirements on a remote retailer. States now have the ability to require sales tax collection from online retailers and other remote retailers with no physical presence in their state if they meet certain economic thresholds.
Physical Presence Nexus
Although Wayfair has recently dominated the sales tax nexus narrative, taxpayers must remember that the resulting economic nexus standard applies in addition to the physical presence nexus standard established through a long line of cases. Taxpayers must still diligently monitor their in-state activities, as even the briefest of visits can create nexus for sales tax purposes unless a unique exemption applies (e.g., a trade show exemption).
Other Nexus Standards
Widespread application of the current economic nexus and physical presence nexus standards will likely cause the vast majority of out-of-state businesses to have a sales tax filing requirement in most, if not all, of the states in which they operate. In the event that a taxpayer falls short of the economic nexus threshold in a state where the taxpayer does not have a physical presence, certain other nexus standards that may apply. These standards are more relevant to smaller taxpayers.
Affiliate nexus can apply when remote sellers work with a third party in the state (i.e., a place of business or an employee or agent) that advertises, promotes or facilitates their sales. This might include maintaining a distribution center, accepting returns, or providing services to the remote seller’s customers. Illinois and Arkansas were the first to enact this type of nexus standard in 2011; however, it should be noted that both states have recently repealed their affiliate nexus provisions. More states may abandon this and other narrowly applicable nexus standards as they continue to develop their economic nexus standards.
If a retailer or service provider contracts with an individual located in-state who directly or indirectly refers potential customers through a web link for a commission, the retailer can be considered to maintain a place of business in that state. With click-through nexus, a sales threshold typically applies. The most common threshold of referred sales is $10,000 per year.
“Cookie” or Software Nexus
A few states have taken the position that software or web cookies can give a business nexus. Massachusetts was the first state to claim that internet vendors are different from catalog vendors because of the apps and cookies they put on the computers and devices of in-state consumers. Connecticut and Ohio followed, and others may do the same.
Marketplace nexus legislation typically applies to companies that work with third party sellers to enable sales through an online marketplace (e.g., Amazon) and to provide e-commerce infrastructure as well as customer service, payment processing services and marketing. States that have implemented this type of nexus standard generally require the marketplace facilitator to register and collect tax instead of the third party seller.
In some states, notice and reporting legislation requires that a retailer notify buyers that they must pay and report state use tax on their purchases. The retailer may be required to send buyers and the state an annual statement of all of their purchases from the retailer.
Small- to mid-sized and fast-growing companies are particularly at risk when it comes to sales tax nexus. They’re big enough to find themselves under the scrutiny of state and local tax officials, but they typically lack the know-how and means to minimize their tax liability and audit exposure. Meanwhile, these sales tax requirements typically do not have a statute of limitations for companies that have not filed, which means the penalties for failing to file returns and failing to pay liabilities can be huge.
With all its complexity and change, sales tax nexus must be closely monitored. The experienced tax professionals at True Partners Consulting can help by working closely with you to: analyze your current business operations; identify states in which you have nexus; determine past, present and future filing requirements; and implement software solutions for compliance responsibilities. To learn more about sales and use tax nexus, contact Christina Edson at Christina.Edson@TPCtax.com.