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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.
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.
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?
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.
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:
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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