Sales Tax Nexus

Determining If You Need To Collect Sales Tax

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The most important issue to understand when considering the topic of sales tax is "nexus" (or physical presence) as it is the factor which will ultimately determine if you are obligated to collect sales tax in a particular jurisdiction.

Sales in Your State: If you are based in a state and sell to customers located throughout that state, you will have established nexus and are required to collect that state's sales tax on all taxable sales regardless of whether the customer comes to your location or you ship the goods to them.

Sales to Customers in Other States: If you sell to customers that are located in another state and you ship the goods to them, you are not required to charge them tax unless you have also established nexus in that state (in which case you would charge that state's sales tax) - or they come to your location to pick up the goods (in which case you would charge your state's sales tax), on the taxable goods or services you sell.

Defining Physical Presence:

The U.S. Constitution requires an out-of-state vendor to have a substantial physical presence in the taxing state for the state to require that vendor to collect sales and use tax. But it does not define what constitutes substantial physical presence and this varies by state. For this reason, it is imperative that any company which is active in more than one state, not only consider the factors detailed on this page, but also any published or distributed descriptions of their business operations, as well as submissions to government agencies in the customer's state.

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Nexus Considerations:

Nexus determination can vary by state and for that reason it is important that you verify the requirements in each state where you have activities. However, we have listed some of the most common factors to consider, with links to supporting content or questions in our "Sales Tax Questions" archive.

Physical Location: Do you have, lease, maintain, occupy or use (directly or through an agent or subsidiary) any office, warehouse or other place of business for the sale (or storage) of goods - or services? In most states, having a physical location will establish nexus for you in a state, and trigger the requirement to collect sales tax.

Activities of People: Do you have temporary or permanent employees, independent contractors, agents or other representatives; operating in (or visiting) a state for the purpose of selling, delivering, installing or assembling taxable products or providing taxable services?

What about representatives entering the state on a regular basis to provide service or repair for tangible personal property? Often, no minimum number of service or repair visits is required to meet the definition. If it is the vendor's policy to provide service or repair for tangible personal property, and the vendor in fact provides such services or repairs, these services or repairs will be regarded as regular. On the other hand, any services or repairs that are provided on a discretionary and infrequent basis may not be regarded as regular.

Other considerations - Do you have traveling or remote sales representatives visiting customers or prospects? If you have nonresident employees (or agents) entering a state to generate sales, you have technically created nexus in any state they visit for sales/use tax purposes. This can be somewhat grey in some states if the presence is limited, but often the statutes reflect that any presence can trigger nexus.

It's also important to remember promotional affiliates who are compensated with referral fees or commissions based on the successful placement of an order. Some states, including New York, Rhode Island, North Carolina, California, Arkansas, Georgia and others have recently passed "Amazon" or "click-through nexus" laws which create a presumption of nexus through affiliate (agent advertising) activities. For updates on the states which have passed these provisions visit the Sales Tax Institute News & Tips Nexus page.

Trade show attendance is another important activity which needs to be considered. Numerous states consider trade show attendance (and/or displays of merchandise for sale at a trade show) as meeting the definition of nexus. In many states this will require the company to register and collect that state's sales tax - not only on the sales made at the trade show but on any other sales shipped to customers in that state at a later date. If you attend the trade show only once, some states offer temporary (or transient, or casual) retailer permits which require that you collect tax only on the sales made at the trade show. Such permits can have limitations however based on the type of product, the total volume of annual sales, and the frequency of sales activity.

Sales Advertising: Do you solicit business on a continuous, regular, seasonal, or systematic basis through advertising in newspapers or periodicals within a state, or on billboards or posters, or through materials distributed by means other than U.S. Mail? If soliciting by mail, do you do so on a continuous, regular, seasonal, or systematic basis? This generally won't establish nexus but can if there are activities performed on your behalf physically.

Delivery of Tangible Personal Property: Do you deliver tangible personal property other than by common carrier?

Corporate Ownership: Is your company owned or controlled by the same interests that own or control a business in the state under consideration - or do you have a franchisee (or licensee) registered and operating under the same trade name in the state?

Ownership of Tangible Personal Property or Inventory: Does your company own tangible personal property that is rented, leased, or offered, on approval, to a consumer within the state in question - or do you have any consigned inventory in warehouses?

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Local (Home Rule) Nexus Concerns:

While the focus of this discussion is state sales tax nexus requirements, it should also be noted that some states also authorize local (or home rule) authorities to administer their own taxes. These states (which include Alabama, Alaska, Arizona, Colorado, Idaho, Illinois and Louisiana) can be particularly challenging when it comes to determining nexus due to the fact that there are both state administered localities and home rule (self administered) localities. The general rule is that once you have established nexus with the state, then you are required to collect the appropriate tax in all localities administered by the state. Alternately, if you establish nexus in a home rule locality then you have a tax collection responsibility for that home rule locality as well as any higher level home rule authorities that share the boundaries. Since the activities that create nexus differ by locality, you are advised to review each individual locality for their nexus creation rules.

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Nexus Assistance and Other Resources:

If you require assistance regarding sales tax issues, YETTER is available to provide a broad range of services. Please call Diane Yetter at 312-701-1800 to discuss your requirements. The Sales Tax Institute also offers classes which review sales tax basics - through to advanced issues and best practices. Register for the Sales Tax Institute Online Course ("Introduction, Definitions and Nexus") to learn more about this challenging topic.

Don't forget about these additional NEXUS resources:

Sales Tax Institute's "News & Tips" (Nexus)

Diane Yetter Talks Nexus on YouTube

Are you a multi-state company with a NEXUS question that we have not yet covered here - or in our Sales Tax Archives (below)? If so - Submit it here.

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Sales Tax Questions - Nexus

To view OTHER SALES TAX TOPICS, use drop down selector (on right) or use site search bar

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Question/Topic  Date 
If I have a US-based business, am I exempt from paying Canadian GST on purchases of advertising from Canadian media outlets? 2014-09-03
How does agent handle sales tax (or VAT) when charging sellers a fee to offer digital goods via on-line marketplace with numerous hosted servers? 2014-09-02
How does a company with 2 divisions or subsidiaries with separate FEIN's handle nexus?2014-07-15
Our Texas telecom cloud company wants to expand into other states. Are our services taxable in other states? Do we charge TX rate or other?2014-06-15
We sell equipment and software that is dropped shipped by third party and we install and repair equipment. Nexus? 2014-02-06
A foreign company exports product to US distributor. Is foreign entity exempt from U.S. sales tax if there is tax treaty?2013-08-04
My client drives to trade shows or "events" and sells on the spot. Does that create nexus? 2013-08-02
We have a nexus in only 2 states, but drop-ship all over US. Will a paid referral program create additional nexus? 2013-06-09
Multi-state company consolidating and closing entities. When we move employees and sales operations, will nexus change? 2013-01-25
Is registration with the Secretary of State (to do business in their respective states) sufficient to establish nexus? 2012-11-26
How does a public company with 2 divisions (or subsidiaries) with separate FEIN's handle nexus?2012-11-26
What if we receive orders from states where we have nexus, but product is shipped to a non-nexus state? 2012-07-29
We sell invitations and periodically have clients outside Texas. For example; we have a client in NM. Do we charge sales tax? 2012-03-25
IA company has NC telecommuter who makes phone sales and attends trade shows. What about nexus? 2012-03-24
I read that TX is an origin-based state, but what if we register in other states?2012-02-08
Will use of direct shipping distributors create nexus for us in other states? 2012-02-06
Our company is incorporated in NY but has location in other state. What about sales tax?2012-02-02
We have nexus in FL and HQ in CO. Do we collect sales tax on FL drop ship orders? 2011-08-29
I purchase and resell videos on-line. Do I pay tax on the full amount or just profit? 2011-08-15
If I have a business in IL and buy product and sell it in TX am I tax exempt?2011-07-26
If one of our PA members sells and delivers item to NY customer, who is responsible for NY sales tax? 2011-07-25
I am a VA photographer but work in NC each summer. Do I charge tax on such sales? 2011-06-17
We sell products to distributors in multi- states.What about tax on shipping charges?2011-06-13
How do I handle sales tax in multi-state scenarios? Do I register in each state? 2011-04-13
Is it ok to not charge tax on out-of-state sales just because you aren't registered?2011-02-24
Do website banner ads, email marketing, or e-commerce servers create sales tax nexus? 2011-02-21
We use distributors to sell sell in-person or online. What about nexus? 2011-01-24
If NC business mails fliers to VA does it need a VA permit or sales tax number?2011-01-04
We will attend a trade show for one day and sell. Do we collect sales tax? 2011-01-03
In AL, does nexus in one city create nexus in every local jurisdiction? 2010-07-27
Do we charge out-of-state customers our rate, their rate - or nothing at all? 2010-07-27
We have a business based in MA. Do we charge people out of state sales tax? 2010-07-26
Our telecommuting sales rep moved to CA. Does move or sales trips trigger nexus?2010-06-21
I receive custom orders and pay sales commissions. Do I have to pay sales tax?2010-01-18
If you do not have nexus - and do not collect/remit the tax - can you be held liable if customer does not pay the tax? 2009-06-10

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Sales Tax Questions answered by Diane Yetter.

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