Top 10 Triggers for Sales Tax Nexus
Published on by Cheryl Ganim in State Local Tax, Tax Services
What you don’t know can hurt you. And that’s particularly true when it comes to sales tax nexus. Since the 2018 South Dakota v. Wayfair decision and the pandemic-fueled explosion of online sales, physical presence isn’t the de facto nexus standard any longer. In this post, we’re digging into the top ten triggers for sales tax nexus – and get ready, because some of them may surprise you.
1. Economic nexus
Out-of-state businesses that generate sales in a state that cross a certain dollar or transaction threshold have created economic nexus with the state. Economic nexus determines when a business must begin collecting and remitting sales/use taxes. The business does not have to have employees or property in the state to be required to register for a sales tax account, and collect and remit that state’s sales tax. Thresholds for economic nexus vary from state to state and were instituted at different times.
Many states set the economic nexus threshold at $100,000 in sales and/or 200 separate sales transactions. Monitoring when and how your businesses’ remote sales have exceeded each state’s economic nexus thresholds is critical to minimizing potential sales tax exposure. Some states include gross sales in the nexus threshold, and others may exclude sales for resale, and/or marketplace sales. If the business is not collecting sales tax from its customers but should have been, that liability can shift from the customer to the business.
2. Marketplace facilitator laws
If your business is selling through an online marketplace platform (think Amazon, eBay, or Etsy), marketplace facilitator laws may apply. Marketplace sales may or may not count towards your business’ nexus threshold, depending on the state, so it’s important to keep track of all sales. Additionally, the marketplace selling platform may or may not be responsible for collecting and remitting sales tax on the marketplace seller’s behalf. Twenty-three states do count marketplace facilitator sales towards the economic nexus threshold, others exclude marketplace sales from the nexus determination, and many states have additional rules and guidelines, and those laws and administrative rules are subject to change.
3. Physical presence
As noted above, physical presence isn’t the primary trigger for sales tax nexus – but it still matters. In addition to brick-and-mortar locations like offices, stores, branches, and warehouses, it can also include renting or owning property – even when the property is located at a site owned by a third party. Having remote employees or contractors in a state can also trigger physical presence nexus – even if it’s temporary. Delivering goods in a company vehicle or storing property in a location owned by someone else (like a fulfillment center) may also be considered physical presence, depending on the state’s specific rules.
4. Remote employees or sales representatives
States are taking a close look at how their tax policies should adapt to new remote work situations, which increased dramatically at the beginning of the pandemic and remain a major part of how many people work today. Nexus is typically triggered when employees or agents are traveling into or working in a state and can also happen when an employee moves to another state. Since that’s a growing trend and it can be difficult to keep up with who’s moving where, nexus could be inadvertently triggered in a state.
Having contract workers in remote states, attending trade shows, and drop-shipping can trigger nexus and filing requirements. Sales of affiliates and pass-through entities can also subject your company to sales tax filing requirements.
5. Event attendance
Believe it or not, attending trade shows or other professional events in another state can also trigger sales tax nexus in that state. Some states are more aggressive on this front: in Arizona, being in-state to solicit sales or establish a market for more than two days per year triggers nexus.
6. Inventory storage
Storing inventory in a warehouse in another state can also trigger nexus in nearly 20 states based on physical presence – even if the warehouse is owned by another party. This is common when a company uses a fulfillment center to process orders – and the obligation to collect sales tax can begin with your first sale (again, different rules in different states). That means that even if you or your employees don’t set foot in the state, you still may have nexus. Consigned inventory may also create nexus.
7. Advertising
This one surprises a lot of people, but it’s a real thing: various states interpret their definitions of soliciting business to include advertising. For example, Texas guidelines state that the regular or systematic solicitation of sales through television, radio, magazines, direct mail, and similar channels can trigger nexus. The guidance is unclear in several states if advertising will cause a business to have economic nexus. On the surface, it might seem simple – but we take our phones with us everywhere, including across state lines – and that makes it extremely difficult if not impossible to pinpoint exactly where someone viewed an ad.
8. Clickthrough nexus
Closely related to advertising nexus is clickthrough nexus. In clickthrough nexus, an out-of-state business with no physical presence in a state will be deemed to have established sales/use tax nexus through an agreement to reward an in-state business for directing potential customers through a website link to the out-of-state online retailer’s business for a commission or referral fee. E-commerce has made it commonplace for businesses to operate in one state or completely remotely and have customers and nexus in every state, including nexus via clickthrough advertising.
9. Affiliate nexus
If your business is connected to a business that already has sales tax nexus in another state, that can trigger nexus for your company too. States have expanded affiliate nexus laws to include activities by unrelated parties that help out-of-state businesses generate or maintain a market in a state.
Keeping up with changes in all the states where you’re doing business (or connected to another company doing business out of state) is key to ensuring you’re collecting sales tax everywhere you need to – and nowhere you’re not.
10. Delivery and distribution nexus
Shipping to customers by common carrier (think the U.S. Postal Service, UPS, FedEx, etc.) won’t necessarily trigger a sales tax obligation through delivery, but delivery in a company-owned vehicle triggers sales tax nexus.
Using a drop shipper creates even more complexity – and due to economic nexus rules, more and more businesses are seeing an impact. With drop shipping, the retailer doesn’t keep items in stock, but orders them from a third party and has them shipped directly to the customer – but it’s not always clear who’s responsible for collecting and remitting sales tax: is it the retailer, the supplier, or the drop shipper?
If the seller does not have nexus and is not voluntarily registered in the state where the sale occurs, but the third-party drop shipper does have nexus or is voluntarily registered in the state where the sale occurs, there is a conflict between some state’s laws and who may accept a resale exemption certificate.
The majority of states allow the seller to issue a resale certificate to the drop shipper, even though the seller is not registered in the state where the sale takes place. Some states deem the third-party drop shipper to be the retailer of the item and require the third-party drop shipper to collect sales tax on the sale to the customer or seller. Of these states, six require tax on the amount of the seller’s selling price to the customer. Seven states require the drop shipper to report on the wholesale price to the seller.
Other considerations
You also need to be aware of trailing nexus: once you’ve established nexus in a state, the obligation can last longer than you might expect. Nexus may continue through the end of the calendar year or longer, even after you’ve ceased doing business and no longer have a presence in a state.
As you can see, sales tax nexus is complicated, and keeping up – and staying compliant – requires constant attention. That’s where sales tax compliance management services come into play. In addition to keeping your business compliant, it frees up critical resources that you can use to grow your business.
Set up a free consultation with one of our top sales tax compliance professionals today and get started building peace of mind. You might also be interested in our Sales Tax Nexus QuickTest – a 2-minute survey that can start you on the right track.
