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

After South Dakota v. Wayfair, the Supreme Court made it legal for states to require businesses to collect and remit sales taxes if the business has enough of an economic presence in the state. While economic nexus compliance can be more complex, you can think of it most simply as the sales made based on the “ship to” address on your invoices. If you’re in IL and shipping candles to a customer in IA, you may have sufficient economic presence in IA to need to register for sales and use taxes and then to collect and remit those taxes. However, your business does not automatically trigger economic nexus by selling goods or services into a state. States have varying nexus compliance thresholds for how much economic activity triggers economic nexus. While the thresholds vary by state, many states have hovered around a common threshold of either 200 invoiced transactions or $100k in sales, whichever is hit first. More populous states like NY, CA, and TX have higher thresholds, but the 200 transactions/$100k rule is a good gut-check to see if your business is close enough to worry about triggering economic nexus. If you feel like you’re triggering nexus, have triggered nexus, or will do so this year, we’d recommend contacting one of our sales & use tax experts.
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