US Sales Tax FAQ
US Sales & Use Tax FAQ’s
Sales tax nexus defines the level of connection between a taxing jurisdiction such as a state and an entity such as your business.
The taxing jurisdiction cannot impose its sales taxes on you until you establish this connection.
Nexus determination is primarily controlled by the U.S. Constitution, in which the Due Process Clause requires a definite link or minimal connection between a state and the entity it wants to tax, and the Commerce Clause requires substantial presence.
In South Dakota v. Wayfair, the Court eliminated the physical presence rule within the Commerce Clause as the standard for creating nexus in a jurisdiction. However, physical presence will still create nexus and is the first consideration in determining nexus. In the lead up to the Court’s decision, many states enacted new types of economic nexus legislation to address how sellers conduct business today.
There is no specific shared definition of nexus across the 50 states.
Moreover, definitions and rules for determining nexus change constantly. Most states are careful to give themselves room to maneuver in their definitions. This means that a business must look at each state individually when determining sales tax nexus. They also must stay constantly on top of a slew of changing regulations and interpretations.
Here are a few representative definitions of Nexus that most states would more or less agree with. As you read them, you can almost feel the steel jaws starting to clamp around you:
typically requires that a remote seller meets a minimum sales threshold in the state in question resulting from activities of an in-state referral agent. The seller must be making commission payments to the in-state resident for any orders that come about as a result of the click-through referral from the resident’s website.
typically requires that a remote retailer holds a substantial interest in, or is owned by, an in-state retailer and the retailer sells the same or a substantially similar line of products under the same or a similar business name, or the in-state facility/employee is used to advertise, promote, or facilitate sales to an in-state consumer. The legislation may not always require common ownership. And it may not include activities related to sales, delivery, service and maintaining a place of business in the state on behalf of the out of state business to benefit the out of state business’ customers.
This typically means that if an online marketplace operates its business in a state and provides e-commerce infrastructure as well as customer service, payment processing services and marketing, the marketplace facilitator is required to register and collect tax as the retailer rather than the individual sellers. This could also impose reporting requirements on the marketplace facilitator.
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legislation typically requires that a retailer must notify buyers that they must pay and report state use tax on their purchases. The retailer may be required to send purchasers and the state an annual statement of all of their purchases from the retailer.
legislation generally requires an out-of-state retailer to collect and remit sales tax once the retailer meets a set level of sales transactions or gross receipts activity (a threshold) within the state. No physical presence is required.
Economic nexus was a central issue in the United States Supreme Court case, South Dakota v. Wayfair. The US Supreme Court ruled on June 21, 2018. South Dakota won the case. The traditional physical presence rule is no longer required. Sales tax and collection requirements can now be imposed on remote retailers. The first Supreme Court decision on nexus since 1992. States can now require tax collection from online retailers. Also, from other remote retailers with no physical presence in their state. But there are certain economic thresholds that they must meet.
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