How do you know when you should collect sales tax? Do I have to collect sales taxes in states where I don’t have a physical presence? What is nexus, physical nexus, and economic nexus? In the wake of South Dakota v. Wayfair, the landscape for sales & use tax compliance has become more complex. A member of our team adapted our partner Avalara’s recent Understanding Where, When and Why Your Business has a Sales Tax Obligation webinar to give this quick guide to nexus compliance:

What’s nexus? Starting with: Physical Nexus

A business is required to collect and remit sales taxes once the business has established nexus for sales taxes in a state. Prior to South Dakota v. Wayfair, physical presence (like buildings, facilities, or employees) in a state was the sole marker for sales tax obligations. Physical nexus is still important, and you can most easily think of physical nexus as anywhere your business has employees (including those “working from home”), buildings (including your home if you don’t have a formal office), or 1099 contractors that act in a sales/marketing role. While economic nexus, which we’ll discuss in a second, is important and more complicated, do not ignore where you have physical nexus! These states’ physical nexus compliance will require you to register and remit sales and use taxes.

Pro Tip: Travelling into a state for a conference where you’re making sales or soliciting customers can trigger physical nexus. This issue can be more complex as the size of the business gained, time spent in the state, and other factors can change whether we’d recommend registering, collecting, and remitting tax.

So, what changed? Introducing: Economic Nexus

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U.S. Supreme Court, South Dakota V Wayfair

As States become more aggressive in the collection of sales tax, cases are making their way to the United States Supreme Court. In the 1960s the U.S. Supreme Court limited states sales tax collection power to individuals and businesses with a physical presence, either themselves or property, in the state. This was reaffirmed in the 1992 Quill decision in Quill Corporation V. North Dakota.

Since the Quill decision, the “physical presence rule” has been challenged in the area of sales tax (31 states now have laws collecting sales tax from internet firms with no physical presence in the state). Horror stories abound including states like Massachusetts and Ohio claiming they can tax any company if their website puts a cookie on an in-state browser.

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