Sales Tax Nexus
July 2, 2021
“Nexus” is the requisite contact between a taxpayer and a state before the state has jurisdiction to tax the taxpayer. Prior to the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, a physical presence in the state was required for sales and use tax nexus. Post-Wayfair, the economic nexus standard, which historically applied for corporate income tax only, became the prevailing standard for sales and use tax nexus. Economic nexus looks at economic activity within a state to determine if a business has nexus.
What is sales tax nexus?
Sales tax nexus is generally established when a business’s retail activity in a state meets a certain dollar amount and/or number of individual transactions.
On June 21, 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc., overturning the physical presence requirement for sales and use tax nexus. The statute at issue in the case required out-of-state retailers who lacked physical presence in South Dakota to nonetheless collect and remit the state’s sales tax if the retailer has $100,000 in sales or 200 transactions delivered into South Dakota in the preceding year.
Many states are now enacting provisions similar to South Dakota’s, under which nexus is imposed on nonresident businesses who meet a specified economic threshold. This may cause businesses to have nexus in significantly more states than they had previously, especially for businesses making online sales of taxable tangible personal property or services.
Download: Survey of State Tax Departments
Our comprehensive report clarifies each state’s position on the gray areas related to the income taxation of corporations and pass-through entities as well as sales and use tax.
What are the Constitutional limitations on the states’ ability to tax?
The U.S. Constitution imposes two significant restrictions on a state’s ability to compel an out-of-state seller to collect and remit use tax on its sales to in-state residents. The Due Process Clause of the U.S. Constitution requires that there be some minimum connection between a state and the person, property, or transaction it seeks to tax.
Similarly, the Commerce Clause, which governs the taxation of interstate commerce, requires that there be a “substantial nexus” between the taxed activity and the taxing state. The Commerce Clause has also been interpreted as prohibiting states from unduly burdening interstate commerce. A significant distinction between the Due Process Clause and the Commerce Clause nexus requirements is that the Commerce Clause nexus requirements may be changed by Congress.
[For a complete discussion of these limitations, read Portfolio 1420-3rd: Limitations on States’ Jurisdiction to Impose Sales and Use Taxes. Not a subscriber? Request a demo.]
Take a closer look at the recent trends in state corporate income taxation, analyze the survey results in these areas, and provide a discussion on recent changes in states’ taxation of corporations.
The states’ responses continue to vary when asked about their policies regarding economic nexus versus physical presence nexus. The Survey of State Tax Departments reveals insights and trends among the states on dozens of sales and use tax issues.
Sales Tax Nexus Standards
What is economic nexus?
The economic presence nexus standard looks at the levels of economic activity within a state to determine if a business activity creates nexus. These statutes generally require out-of-state businesses to collect or pay tax in a state if they meet a specified threshold of sales made or revenue generated within the state. The U.S. Supreme Court validated economic nexus for sales tax purposes in South Dakota v. Wayfair.
Under the economic presence nexus standard, an out-of-state corporation may trigger nexus by conducting a certain amount of economic activity within the state (e.g., $100,000 of annual sales to customers in the state) even if the corporation lacks a physical presence within the state’s borders.
Your state tax resource to navigate the Wayfair decision’s impact on U.S. sales tax for online businesses.
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