Sales tax is a major revenue generator for most states and is required to be collected and paid by businesses that have a presence (nexus) within a state’s borders. Prior to the historic court case South Dakota v. Wayfair, Inc., sales tax nexus was cut and dry. If a business had a physical location within a state, they had nexus. If there was no physical presence (remote seller, e-commerce, etc.) then the business was not required to collect or remit sales tax. South Dakota v. Wayfair, Inc.was a landmark case that changed how nexus is determined and opened new ways for states to determine that a business has nexus in addition to physical presence. Different types of nexus now include physical nexus, economic nexus, click-through nexus, affiliate nexus, cookie nexus, and marketplace nexus.
Physical Nexus: The business has physical presence in the state (i.e. office, warehouse, business registration, owners, and remote employees.)
Economic Nexus: The business meets a threshold of annual sales within a state. Typically the threshold starts at $100K in annual sales and/or 200 annual transactions, but this can vary from state to state. It is important to note that no physical presence is required to meet this nexus requirement, or any that follow.
Click-Through Nexus: The business establishes nexus through in state referral programs or affiliate links regardless of physical or economic thresholds.
Cookie Nexus: The business establishes nexus by creating and installing data packets (cookies) on instate computers.
Marketplace Nexus: The marketplace facilitators (think Amazon) may be required to collect and remit sales tax instead of the business.
Economic nexus is one of the most popular for remote sellers. However, as described above, it is not the only type of nexus. The penalties for failure to collect and remit sales tax can be high, and could essentially put a small business out of operation if they get audited and end up owing sales tax for prior periods, so businesses should do a thorough nexus study at least annually to determine if they have established nexus.
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