You’ve likely heard the term nexus mentioned, but do you know what it really means? While the term nexus relates to several different matters, herein, we’re going to focus on nexus as it relates to sales tax. In brief, sales tax nexus means that if an out of state business has a sufficient physical presence in a state, then that business is subject to the sales tax rules of that state or jurisdiction. The physical presence of a business within a state is the determining factor of whether the out of state business selling products within a state is required to collect sales or use tax on sales in that state. Nexus (the physical presence) is required before the state can impose taxes on a business.
Examples of sales tax nexus in a state are as follows:
- The business having a physical location in the state (corporate office, satellite office, warehouse);
- Resident employees working in the state;
- Employees, such as sales people, who regularly solicit business in the state.
If your company maintains a temporary or permanent presence of people or property in a state, nexus has been created, and your business is subject to the sales tax rules of that state. Sales people and other employees visiting states to call on customers, or prospective customers, attending trade shows, or having consigned inventory in warehouses create the temporary presence nexus in a state.
Each state has its own set of nexus rules. Therefore, if your business has a temporary or permanent presence in different states, it is imperative to check to see what that state’s nexus rules are. If you find that your business does have sales tax nexus in a state, you will need to do the following:
- Register to conduct business in that state;
- Charge sales tax to customers who reside in that state;
- File a sales tax and income tax return in that state
Note that having a nexus in a state doesn’t just apply to sales tax, it also applies to income tax as well. If you meet the requirements of having nexus in a state, not only will your business be required to collect sales tax on certain products and services, but you will also be required to pay state income tax on income generated in that state. If your business has a nexus in multiple states and you are generating income within those states, your business will be filing multiple sales tax and state income tax returns.
