In an increasingly interconnected economy, companies of all sizes find themselves operating across state lines, whether through physical presence, online sales or remote employees. This expansion brings complex tax obligations that can significantly impact financial health and compliance status. Enter “sales tax nexus” – a critical yet often overlooked consideration for businesses engaged in interstate commerce. It determines when a business has sufficient presence in a state to be subject to its sales tax laws.  

It’s crucial for your business to understand what triggers sales tax nexus in each state as part of your tax planning efforts. Sales tax nexus impacts your company’s ability to accomplish the following:  

• Meet compliance requirements 
• Make informed decisions about expansion 
• Accurately forecast tax obligations 
• Minimize financial risks  

This article will explore the concept of sales tax nexus, its significance for your business and how conducting a nexus study can protect your business interests. 

What is sales tax nexus? 

Sales tax nexus refers to the connection a business has with a state that creates an obligation to collect and remit sales tax. The concept is crucial for businesses operating across state lines, as it determines their tax responsibilities in different jurisdictions. The notion of nexus has evolved significantly, especially with the rise of e-commerce and digital services. 

The shift from physical to economic nexus: The Wayfair decision 

Originally, nexus was primarily based on physical presence in a state. However, the landscape changed dramatically with the 2018 South Dakota v. Wayfair Supreme Court decision. This landmark case introduced the concept of “economic nexus,” allowing states to require out-of-state sellers to collect sales tax based solely on their economic activity, even without physical presence. 

How do you know if you have sales tax nexus? 

Determining whether your business has nexus in a particular state can be complex. It’s important to understand the various types of nexus and how they might apply to your specific business activities. 

Types of sales tax nexus 

There are several ways a business can establish nexus in a state. Let’s explore the main categories: 

1. Physical presence: Having a tangible presence or physical ties in a state, such as:
   Offices, stores or warehouses
   Employees or sales representatives
   Inventory storage (including in third-party fulfillment centers)
   Attendance at trade shows or temporary events
2. Economic presence: Reaching a certain threshold of sales or number of transactions in a state even when a business doesn’t have a physical presence.
3. Affiliate relationships: Having ties to affiliates, partners or other businesses in a state
4. Remote employees: Having workers based in different states can create nexus even if you don’t have a physical office there.

Nexus triggers and considerations 

Your business should be aware of the following common sales tax nexus triggers and complexities:  

Varying thresholds 

Each state sets its own economic nexus thresholds. While many use $100,000 in sales or 200 transactions, states like California and New York have higher thresholds. Some businesses, such as e-commerce, need to be particularly vigilant. Adding to the complexity, many states are moving away from transaction count thresholds, focusing solely on sales volume. 

Taxability of products and services 

The taxability of your offerings can vary widely between states. For example: 

• Software-as-a-service (SaaS): The tax treatment of SaaS products is particularly inconsistent across states. Some states consider SaaS to be a taxable tangible product, while others view it as a non-taxable service. This discrepancy can significantly impact your tax obligations. 
• Drop shipping and fulfillment: Utilizing third-party logistics providers can create unexpected nexus issues. You may establish nexus in states where your inventory is stored or shipped from, even if you have no other presence there. This is especially relevant for e-commerce businesses using fulfillment services like Amazon FBA. 
• Digital products: The taxability of digital goods such as e-books, online courses or downloadable media varies by state. Some states have updated their tax laws to specifically address these products, while others apply existing regulations, leading to inconsistent treatment across jurisdictions. 

Invoicing practices 

How you structure your invoices can impact your tax liability. For example, if you charge a lump sum, all products may become subject to sales tax, even if only one item is taxable. If you itemize, only the taxable item will likely be subject to sales tax. 

Remote work implications 

The rise of remote work has created new nexus considerations. Having employees working from different states can potentially create nexus even if you don’t have a physical office there. This is giving employers nexus not just for sales tax but also for income and franchise taxes. 

Agents and independent contractors 

It’s important to note that having agents or independent contractors operating in a state to establish or maintain a market for your products can also create nexus. This is considered “doing business” in the state and can trigger tax obligations. 

Industry-specific considerations 

Here is a sample of industry-specific sales tax nexus challenges your business might encounter: 

• Consumer products: Companies selling tangible goods often face straightforward nexus determinations, but challenges can arise with drop shipping arrangements or marketplace sales. 
• Technology: Tech companies, especially those offering SaaS or digital products, face complex taxability issues as state laws struggle to keep pace with technological advancements. 
• Agriculture: Agricultural businesses may encounter unique nexus issues related to the taxability of certain products or exemptions for farming equipment and supplies. 

These variations highlight the importance of understanding the specific tax laws in each state where you conduct business, as misclassification of products or services can lead to compliance issues. This complexity makes a thorough nexus study essential. 

The importance of a sales tax nexus study 

A nexus study comprehensively evaluates your business activities to determine tax obligations across jurisdictions. This assessment offers several benefits: 

• Compliance: Helps ensure your business meets tax requirements across all relevant jurisdictions. It can also reveal where you might unknowingly be subject to an income or franchise tax. 
• Risk management: Examines operations, sales patterns and state laws to identify current and future nexus, allowing proactive risk mitigation. 
• Liability assessment: Estimates potential exposure, including back taxes, interest and penalties for unaddressed nexus. 
• Strategic planning: Informs decisions on expansion, remote work policies and distribution strategies while aiding in budgeting and pricing. 
• Audit preparation: Reduces the risk and impact of state tax audits, helps avoid penalties and uncovers tax planning opportunities. 

By conducting a nexus study, you can make informed business decisions and gain peace of mind regarding your tax obligations. 

Why sales tax nexus matters 

Failing to address sales tax nexus can have serious consequences, including: 

• Back taxes: The business may owe uncollected taxes dating back to when nexus was first established. 
• Penalties and interest: If the business fails to collect sales tax from its customers, it will have to pay past-due sales tax out of its pocket. Interest and penalties can add up to 25% or more of the tax owed. 
• Increased audit risk: A greater likelihood of being selected for a state tax audit. 
• Personal liability: In some cases, company officers may be held responsible for unpaid sales taxes, which are considered a trust fund tax collected on behalf of the state.  
• Decreased selling price: It can reduce the selling price of your company when/if you go to sell. 

The nexus study process with BPM 

At BPM, we approach sales tax nexus studies in phases to provide flexibility and control for our clients. 

How BPM can help 

Sales tax nexus regulations are continually evolving. States are becoming more aggressive in enforcing economic nexus rules, and businesses need to stay ahead of these changes. If your business operates or plans to operate across multiple states, you should develop a corporate tax planning strategy that minimizes risk by clearly identifying sales tax nexus requirements in every state where business is conducted. 

At BPM, our experienced state and local tax (SALT) team can guide you through the complexities of sales tax nexus. We offer solutions that are: 

• Tailored: We understand the unique needs of different industries and business models; we customize our nexus studies and approach accordingly. 
• Comprehensive: We bring in-depth knowledge and experience in multi-state taxation, thoroughly evaluating potential nexus triggers and tax implications so that no detail is overlooked. Our ongoing support adapts to your evolving business needs. 
• Proactive: We help you stay ahead of changing nexus laws and thresholds. 
• Strategic: We don’t just identify issues – we provide actionable recommendations and solutions to optimize your tax position for compliance and risk management. 

Don’t let unrecognized sales tax nexus catch you off guard and put your business at risk. Contact BPM today to learn how we can help you better understand your obligations and mitigate potential liabilities.