In the U.S., as the law of the land stands right now, retailers are only required to collect sales tax from buyers in states where they have sales tax nexus. This post will take a deep dive into why nexus is important, what business factors create sales tax nexus, and how nexus might change in the future.
Sales Tax Nexus 101
“Sales tax nexus” is just a fancy, legalese way of saying a “significant connection” to a state. Sales tax nexus has been the law of the land since the 1992 Quill v. North Dakota Supreme Court case.
To make a long story short, the Quill Corporation was selling office supplies to buyers in North Dakota but not collecting sales tax. They had no physical presence in the state, but were only shipping the products to buyers. In their ruling, the Supreme Court ruled in favor of Quill, stating that businesses must have physical presence in a state to be required to collect sales tax. The Justices’ opinion in the Quill case specifically mentioned that it would be up to lawmakers to make a change to this precedent. (More on that later).
The result of that case is why an online seller who works out of her garage in Ohio only has to collect sales tax from buyers in Ohio. It’s also why an online seller who sells via FBA is technically required to collect sales tax from buyers in (almost) every state where his inventory is stored. (New York is the exception to the rule – they ruled that only using 3rd party fulfillment in a state does not create sales tax nexus.)
Forty-five states and Washington D.C. all have a sales tax, and they all get to make their own sales tax rules and laws. So while each state’s laws are slightly different, a few business factors generally create nexus in a state.
Business Factors that Create Sales Tax Nexus Across the United States
You can see a list of what factors create sales tax nexus in every state here. But in general, the following creates sales tax nexus:
Brick and Mortar – A Physical Presence
In this case, a physical presence can be anything from a brick and mortar store or warehouse to a spot at the kitchen table where you run your small business. A physical presence creates sales tax nexus. This generally includes “having a stock of goods for sale” in a state.
Employees or Other Personnel
Employees, installers, salespeople and often even contractors who work directly in your business create sales tax nexus.
If you have a 3rd party located in a state who sends sales to your business in exchange for a small cut of the profits then many states say that creates nexus. You can read more about click through nexus here.
Distributor Location: A Drop Shipping Relationship
In some cases, if you have a distributor ship products directly to your customer you may have sales tax nexus in the state where your distributor is located. This must be determined on a case-by-case basis.
Temporarily Doing Business in a State
If you sell items at a tradeshow or craft fair in a state, then you might have sales tax nexus. Each state’s guidelines on selling temporarily are different, but you can read more about whether temporary sales create sales tax nexus in your state here.
What is the Future of U.S. Sales Tax Nexus?
The Quill precedent stating that retailers only have to collect sales tax in states where they have a physical presence was set back in 1992 – years before eCommerce exploded.
These days, with more and more consumers buying online, states are watching sales tax revenue slip through their fingers. Some states have passed (arguably unconstitutional) “economic nexus” laws stating that companies who sell more than a certain threshold in their state (usually around $100,000) have nexus in the state and are required to collect sales tax. These state laws were quickly challenged in courts, which is exactly what the states want. The states aim to have this issue heard in front of the Supreme Court in hopes of overturning Quill and requiring online retailers to collect sales tax in more states.
Meanwhile, a few laws to “reform” internet sales tax have also floated before Congress, though none gained much traction.
The concept of sales tax nexus, and where and from whom online sellers and other retailers are required to collect sales tax, is up in the air right now. It’s important for online sellers to keep an eye on nexus legislation and court cases. In the future, online sellers may be required to collect sales tax in more than just their “nexus” states.
I hope this post has answered your burning questions about sales tax nexus. For a whole lot more about sales tax, check out our Sales Tax 101 for Online Sellers Guide.
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