When talking about multistate taxes, nexus is a term commonly used. In this article, we will go over what nexus means and its three types: physical, economic, and affiliate.
Further, we will go over the history and related case law that impacts nexus meanings and how states determine if you have one.
We will also discuss what constitutes doing business in California, issues with remote sellers, registering our business with California’s Secretary of State, and when to begin collecting taxes.
Let’s dive into this.
Nexus refers to the level of minimum contacts that you have in a state.
These contacts can be physical contacts, such as employees present in the state in question, conducting business in a state, or sufficient contacts through third parties such as independent contractors and vendors. Even if your business is located in one state but you have employees or independent contractors in another, this could create nexus with the latter state.
Additionally, if you use drop shipping—a type of shipping where customers submit your order to you, and you send that order to the vendor, and then the vendor thereafter ships the product to the customer—that can trigger nexus with a state. All of these examples fall under the category of physical nexus.
If your company conducts business in other states, your company will be deemed a marketplace facilitator. This derives from the U.S. Supreme Court’s recent decision in the Wayfair case (which will discuss in more detail below).
A marketplace facilitator is an entity that serves as a platform for other merchants to sell goods or services. Marketplace facilitators list the products, collect payment and in some instances, also ship the orders. In some states, marketplace facilitators are required to collect and remit sales tax from third parties.
While this creates headaches for businesses, especially small ones, the decision clearly favored states and their tax collectors. It is now far easier for a state to collect sales tax from a few entities than to try to track down payments from thousands and thousands of individual businesses.
So if you do business outside of your home state, you need to figure out in which states you have economic nexus.
The most commonly used threshold for states is that if a business does more than 200 transactions or $100,000 of business in another state, then the business has nexus (i.e., presence) in that particular state and must pay sales tax.
Not all states use $100,000 as their sales threshold, and some states have no transaction threshold because either their law was enacted without a transaction threshold or the threshold has since been eliminated.
In most states that have both a sales and a transactions threshold, it’s an “OR” situation, meaning only one of the thresholds is sufficient to demonstrate an economic nexus. In some states, both the sales AND transactions thresholds must be met in order to determine that there is an economic nexus.
Thresholds have changed since first enacted or are scheduled to change in the future:
- Arizona’s sales threshold has been steadily decreasing — $200,000 (2019), $150,000 (2020), $100,000 (2021).
- Connecticut’s and Georgia’s sales thresholds were originally $250,000 and have changed to $100,000.
- Several state’s initially adopted transaction thresholds which have since been repealed, including Colorado, Iowa, North Dakota, and Washington.
- Some states (e.g., Pennsylvania, Washington) initially adopted very low sales thresholds ($100,000). These states generally gave sellers an option to register/collect/remit or comply with Notification and Reporting laws.
As you can see, there is a wide discrepancy between the states when it comes to determining how to comply with economic thresholds. This illustrates the importance of working with a skilled tax attorney to help you navigate through this sea of shifting regulations.
When to Begin Collecting State Sales Tax
Some states specifically address when a remote seller who reaches an economic nexus threshold must begin collecting, reporting, remitting sales tax. Other states do not. Some states impose an unrealistic “compliance date” (e.g., the next day after the threshold is reached) as their standard.
- Kentucky: Must register no later than 30 days after a threshold reached. See Ky. Rev. Stat. Ann. §139.340(2)(g)(2).
- Nebraska: Must obtain a sales tax permit and begin collecting and remitting sales tax on or before the first day of the second calendar month after the threshold is exceeded.
- North Dakota: A seller that exceeds this sales threshold must obtain a permit and begin collecting the tax on sales delivered during the following calendar year or beginning 60 days after the threshold is met.
- Texas: A seller must obtain a permit and begin collecting no later than the first day of the fourth month after the month in which a remote seller exceeds the safe harbor amount. See 34 Texas Administrative Code §3.286 for more details.
- West Virginia: In any calendar year when either of the thresholds is met, the seller must begin to collect sales and use taxes on sales made after the date either of the thresholds is met.
Marketplace sellers are still responsible for collecting, reporting and remitting tax in sales made on their own webstore (non-marketplace sales). Other eCommerce platforms, such as Shopify, WooCommerce, Magento, are generally not considered to be marketplaces as they are hosting platforms.
In some states, remote sellers who sell only via a collecting marketplace are not required to register in the marketplace states. In other states, even if all sales are via a collecting marketplace, sellers must register/stay registered and continue filing.
- Nevada: The marketplace provider is required to collect tax on behalf of sellers in Nevada if, in the current or immediately preceding calendar year, it had cumulative gross receipts exceeding $100,000 from retail sales made in Nevada or had over 200 sales in the prior calendar year. Nevada also allows the marketplace provider to contract with the seller responsible to collect sales tax.
- Georgia: The marketplace provider that facilitates retail sales of $100,000 or more in aggregate in the previous or current calendar year is responsible on behalf of a marketplace seller to collect sales tax.
- Colorado: Both the marketplace provider and the individual seller must comply and report the appropriate sales tax. Only the marketplace provider is responsible for collecting.
Sales Tax Nexus Guidelines Specific to California
The following dates are specific to California:
Economic Nexus as of April 1, 2020: Yes
Economic Nexus Enforcement Date: April 1, 2019
Sales Threshold: $500,000
Transactions Threshold: None
Measurement Period: Previous or Current Calendar Year
Treatment of Sales for Resale, Exempt Sales for Threshold: Both Resale and Exempt Sales Included: Yes
Marketplace Tax Enforcement Date: October 1, 2019
Sales on a Collecting Marketplace Included in Threshold: Yes
Affiliate nexus is when an out-of-state business has an “affiliate” located in-state. Thus, the out-of-state business would have enough of a significant presence with the in-state business that the in-state business would be required to collect and remit sales tax for the out-of-state business.
Confusing? Keep reading.
Click-through nexus is a type of affiliate nexus. If an in-state person directly or indirectly refers a potential customer to the retailer for a commission or other consideration, the retailer is treated as having nexus in that state.
For example, if a website was based in a state and at that time had some type of ad that when a consumer clicked that ad/website, and that consumer finished that purchase through that link, you would get commission from (e.g., Amazon) and you would establish a click-through nexus.
Here is a little bit of background on affiliate nexus. In 1992, in the case of North Dakota v. Quill, the U.S. Supreme Court ruled that Quill Corp., an Illinois-based office supply company, did not have to pay sales tax because it was deemed to not have a presence in North Dakota.
However, in 2018, this decision was overruled by the Supreme Court in the South Dakota v. Wayfair, where the State of South Dakota brought suit against Wayfair and three other major online sellers, asserting that they should be collecting and paying sales tax. This ground-breaking decision (Wayfair) opened the door for states to establish their own thresholds for nexus.
The waters get further muddied when dealing with remote sales. States commonly define sale for purposes of its thresholds: tangible personal property, services, leases, licenses, electronically delivered software, SaaS (Software as a Service), and digital products.
Some states explicitly address whether a remote seller’s sales on a “collecting marketplace” are included in determining whether the remote seller has economic nexus, whereas in other states, the statute is less clear and/or state guidance is vague.
As some examples:
- Kentucky’s economic nexus thresholds apply to “Any remote retailer selling tangible personal property or digital property delivered or transferred electronically to a purchaser in this state, including retail sales facilitated by a marketplace provider on behalf of the remote.” See Ky. Rev. Stat. § 139.340.
- Nebraska’s $100,000 threshold is based on total retail sales (all sales other than resale, sublease, or subrent) in the prior calendar year or current calendar year, including sales made through a Multivendor Marketplace Platform (MMP).
- In Oklahoma, sales by a remote seller made through a marketplace forum or a referrer's platform where the tax is collected and remitted by the marketplace facilitator or referrer shall not be included in determining whether the remote seller has met the threshold amount provided in this subsection.
Many states address this in the marketplace tax provisions (not in the remote seller provisions), which may have been enacted/adopted after the remote seller economic nexus provision was enacted.
Cookies and Other Marketing Activities
As if it could not get more complicated, some states are factoring “cookies” into the threshold for nexus. We’re talking internet cookies, not your grandmother’s baked goods. Cookies are bits of code stored on a site that recognize visitors, track usage, and authenticate.
Cookie nexus is the assertion of “physical presence” due to “cookies” being placed on a prospective or current customer’s computer. As an example, when a customer accepts cookies from a merchant’s website, a merchant is creating a physical presence for nexus purposes. In Massachusetts, if the number of cookies and sales exceed the transaction threshold, then that constitutes nexus. However, Massachusetts “cookie law” is presently undergoing legal challenges.
So When Does Nexus Exist?
The inquiry as to whether a nexus exists is highly complicated, especially since there is no consistency across jurisdictions.
Every state has different standards. However, do not be lulled into a sense of false security by looking at the rules once. The definition of what constitutes nexus is proving to be very fluid. Two examples are Ohio and Oklahoma, which changed their nexus within one year.
With that said, keep the following in mind:
- All but two states have enacted/adopted economic nexus for sales tax.
- Measurement period: Although most states use a prior or current calendar year, others use the prior 12 months or previous four quarters.
- State laws are changing and adapting to legal challenges.
- Always review statutes, regulations, and administrative guidance.
- Use charts as a tool to guide you when determining economic nexus.