Most multi-state businesses are familiar with the concept of “nexus”—the minimum connection necessary before a state can exercise its taxing authority over a taxpayer. Traditionally, nexus was synonymous with “people” and “property,” that is, having the business’ employees or property physically in the state. However, as the economy has evolved, so too have state nexus laws. Many states have adopted economic nexus standards for both income and sales tax, subjecting a business to tax even when the business lacks any type of physical presence in the state. Here are three things you may not know about nexus.
- For the most part, physical presence is a thing of the past.
Last summer, the United States Supreme Court’s decision in South Dakota v. Wayfair ushered in a new era for sales tax nexus. The Court discarded the “physical presence” standard that had been the law since 1967. In the wake of Wayfair, over thirty states and the District of Columbia now have economic nexus laws in place for sales tax. This means if a business exceeds a certain dollar threshold in sales or transactions in a state, the business could be responsible for collecting and remitting that state’s sales tax. Nearly all states also employ an economic nexus standard in the income tax context. The bottom line—nearly every business that makes sales into other states needs to track those sales and re-evaluate its sales and income tax obligations.
- You could have property in a state without knowing it.
Attention all Amazon FBA sellers—you could have property in a state and not know it. Through the popular “Fulfillment by Amazon” program, Amazon sellers store their inventory in Amazon fulfillment centers across the country. When a customer places an order, Amazon then packs and ships the product on behalf of the seller. In most states, the presence of property in the state (even temporarily) creates nexus for income and sales tax. Thus, the FBA program can have the unintended effect of creating nexus for sellers in states where their inventory is stored, which likely will differ from the state to which the seller originally sent its inventory to Amazon.
- Independent contractors are people, too.
Finally, state laws are very broad when it comes to the definition of “people.” Generally, any type of representative, including sales reps and independent contractors, in the state on behalf of the business could create nexus. In an age where many employees work remotely and independent contractors provide services traditionally performed by employees, it can be difficult for a business to keep track of all its “people.” However, tracking this information is necessary for a business to comply with its state tax obligations.
Keeping up with state tax nexus laws is no easy feat. For further information or assistance, please contact your tax advisor or learn more about Dean Dorton Tax Services at the link below:
Erica Horn, CPA, JD
Tax Associate Director
ehorn@deandorton.com • 859.425.7674
Maddie Schueler, JD, LLM
Senior Tax Consultant
mschueler@deandorton.com • 502.566.1009
