Sales Tax 101: Nexus

NEXUS …

What is it and why should you care?

Well, are you doing business in multiple states? If you are, understanding nexus is a must for your business or it could cost you big time.

The concept of nexus is relatively simple however determining nexus has become fairly complex. Nexus (a.k.a sufficient physical presence) creates the responsibility to collect and pay tax on sales in the state you are doing business. Just as the term implies, it is the sufficient physical presence that creates nexus. Sufficient physical presence used to be fairly straightforward, however, with the rise of online retailing, the meaning of physical presence is evolving.

Sidebar: Activities that create nexus for sales tax purposes do not determine nexus for income tax. Some of the considerations are similar in nature but the extent of the activities generally vary. How about that for confusing?

So what types of activities could create nexus? Nexus is determined on a state by state basis (what creates nexus differs by state). Here are a few questions to get you started thinking about activities that could create nexus:

  • ¬†Where are your employees or contractors (ex. salespersons, independent sales reps, subcontractors, etc.) located?
  • In what states do you attend trade shows?
  • In what states do you advertise locally?
  • What states do you have licensed franchises?
  • Do you have related entities? What states are they located?
  • What states do you have licenses on your intellectual property?
  • In what states do you have ownership of (or lease) real or personal property?
  • In what states are you maintaining inventory?
  • What states are your employees traveling for business purposes (sales, training, deliveries, installs/repairs, etc.)?

Bottom line, there are many considerations to determining nexus. If it seems too much, there are experts in the field of sales tax.

NEXUS