What is Nexus? Nexus is a legal term that refers to the level of connection a business or individual has with a municipality, state, or country, determining tax obligations. In the United States, tax nexus dictates whether a company must collect and remit sales tax or be subject to state income taxes. For example, a business may be required to remit sales taxes in a state other than where it is headquartered if it conducts business in that state.
While requirements for establishing nexus vary between jurisdictions, businesses must understand these rules to remain compliant. This article explores key scenarios that create tax nexus, though a case-by-case analysis is necessary, and consultation with a tax expert is recommended.
Evolving Landscape of Tax Nexus
Historically, tax obligations were straightforward—physical presence dictated tax liabilities. However, as commerce evolved, so have nexus laws. Businesses now operate across multiple states, employ remote workers, and engage in e-commerce, significantly broadening the concept of tax nexus.
Types of Nexus
The definition of tax nexus continues to evolve, with various triggers beyond physical presence. States have broadened their tax reach through legislative and judicial developments, particularly in response to economic activity across state lines.
1. Physical Presence Nexus
Physical presence nexus occurs when a business operates within a state through locations, employees, or significant property. This can include:
Owning or leasing office space, warehouses, or retail locations.
Maintaining inventory in a fulfillment center within a state (such as Amazon FBA warehouses).
Having employees, independent contractors, or sales representatives working in a state.
Participating in trade shows or events where sales transactions occur.
2. Economic Nexus
Economic nexus is established when a business exceeds a state’s sales or transaction thresholds, even without physical presence. This standard became prevalent following South Dakota v. Wayfair, Inc. (2018), allowing states to impose tax collection requirements based on sales volume or revenue generated within their jurisdiction.
Most states have adopted economic nexus laws with thresholds typically set at:
$100,000 in annual sales OR
200 separate transactions within the state
However, specific thresholds vary by state. Businesses selling online must track where they are required to register and collect sales tax.
3. Factor Presence Nexus
Some states impose nexus based on a business’s financial footprint, including:
Exceeding a revenue threshold within the state (e.g., $500,000 in sales).
Maintaining a certain percentage of payroll or property within the state.
Many states use a combination of sales, payroll, and property to determine factor presence nexus.
4. Agency Nexus
Agency nexus is created when a business contracts third parties (such as affiliates, sales agents, or fulfillment centers) to operate on its behalf in another state. This also applies to:
Businesses working with independent sales representatives.
Online businesses leveraging in-state affiliates to generate sales ("click-through nexus").
5. Marketplace Facilitator Nexus
With the rise of online marketplaces, states now require platforms like Amazon, eBay, and Etsy to collect and remit sales tax on behalf of sellers. This simplifies compliance for individual sellers but does not eliminate their reporting responsibilities.
6. Remote Employee Nexus
The increase in remote work has impacted tax nexus rules. If an employee resides in a different state from the business, that state may require payroll tax withholding and corporate tax compliance. Some states have reciprocal agreements, while others enforce strict nexus laws based on employee location.
State-Specific Considerations
Public Law 86-272 Protections: This federal law still limits state income tax obligations for businesses engaged solely in the solicitation of tangible personal property. However, states are increasingly challenging its applicability to modern business models.
Income Tax Nexus vs. Sales Tax Nexus: A business may owe income tax in a state even if it is not required to collect sales tax, and vice versa.
Why Understanding Nexus is Crucial
Failing to comply with nexus-related tax obligations can result in audits, penalties, and interest charges. With states aggressively pursuing tax revenue, businesses must:
Regularly assess their nexus status.
Implement systems to track state-specific thresholds.
Work with tax professionals to ensure compliance.
As tax laws evolve, businesses should stay informed and proactive in managing their multi-state tax obligations. If you need assistance evaluating your company’s tax nexus, contact our office to discuss your situation with an expert advisor.