Introduction to Nexus and State Tax Obligations

Nexus, within the realm of taxation, refers to the sufficient connection or presence that a business must establish with a state to be subject to its tax laws and regulations. This connection forms the basis for a state to impose tax obligations on a company’s activities. Understanding nexus is crucial for businesses as it impacts their compliance and overall tax strategy. 

Broadly, nexus can be classified into three main types: affiliate, economic, and physical. Each plays a distinct role in determining state tax obligations.  

• Affiliate nexus is when a business has an affiliated or subsidiary entity in a state, often linked by shared ownership or branding. Typically, the state mandates the business to collect and remit sales tax if the affiliated entity has a physical presence there. In June 2018, the U.S. Supreme Court's decision in South Dakota v. Wayfair effectively overturned the physical presence standard for establishing substantial nexus. This ruling enabled states to impose sales and use tax obligations on sellers with an economic presence in the state, provided they meet certain sales thresholds or transaction volumes for goods delivered within that state. 

• Economic nexus, on the other hand, is a relatively more modern concept that takes into account a business's economic activities within a state, regardless of a physical presence. This could include factors like the volume of sales, the number of transactions, or the total revenue generated from customers within a particular state. The evolution of economic nexus has arisen due to the growth of e-commerce and digital transactions, enabling states to capture revenue from businesses that conduct substantial economic activity within their borders, even if they lack a physical presence. To determine whether your business has met the economic nexus threshold, please reference our interactive Wayfair and Economic Nexus Map. 

• Physical nexus is established when a business has a tangible presence within a state, such as a brick-and-mortar store, office, warehouse, or employees working within that state.  

Sales Tax Nexus 

Sales tax nexus determines a business's obligation to collect and remit sales tax to a state’s authorities, triggered by specific connections or activities within that state. While traditional nexus relied on physical presence, such as a store, office, or warehouse, the rise of economic nexus has shifted the focus to thresholds like sales volume or transaction counts. Online sales and digital interactions further contribute to nexus determinations. 

It’s important to note that the specifics of sales tax nexus vary widely across states. Each state establishes its own rules and thresholds, creating a complex patchwork of requirements. Businesses must stay informed of these variations to ensure accurate and timely compliance. 

Navigating Compliance 

As businesses expand their reach and serve customers across state lines, the intricacies of sales tax nexus take on a more significant role. Our commitment to compliance involves not only identifying when nexus is established but also efficiently managing the collection and remittance of sales tax in the states where nexus exists. By leveraging technology and adopting a proactive approach, we can navigate these obligations with confidence 

Contributor: Megan Bryarly 

How Can We Help? 

Allyn's tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state, and local tax compliance and consulting for large US and global corporations. Our website is constantly updated with tax content designed to help your team function smoother. Visit us here.  

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About Allyn International 

Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance.  Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe, and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China and Prague, Czech Republic. For more information, visit www.allynintl.com.