A tax nexus is a relationship between a taxing authority and a business. A nexus must exist before a taxing authority can impose a tax on the business, and it requires that there be a substantial link between the tax jurisdiction and the business.
There are several different kinds of nexus, and they vary from jurisdiction to jurisdiction.
A business might have tax nexus in a jurisdiction because:
- It has a physical location in the jurisdiction.
- It has resident employees working in the jurisdiction.
- It has property, including intangible property, within the jurisdiction.
- It has employees who regularly solicit business there, such as salespeople.
- It sells over a specific amount or threshold.
A nexus for sales tax purposes has historically required that a business have a physical presence in a state, but the advent of the internet has driven states to more closely consider online businesses and their non-payment of sales taxes.
These are especially important to watch since the Supreme Court decision on Wayfair in June 2018, which knocked the “physical presence” precedent off its throne, setting off a wave of new tax policies that affect remote sellers.
Some US states have come up with several ways to determine a nexus for online transactions:
- A click-through nexus exists when your business receives sales referred by another business located in the state. If you run ads or links on an in-state website, which channels potential customers and new business to you, this counts as the aptly-named click-through nexus. Most states have a minimum sales threshold for this nexus, so the rule only kicks in once you surpass a certain amount of gross sales.
- An affiliate nexus involves affiliates that are independent businesses that sell through other businesses. The Amazon Affiliates program is a good example. This type of nexus often requires that a commission for referrals be paid by the affiliate. Again, most states have minimum sales thresholds, so the nexus (and tax obligations) only applies once you surpass a certain amount of gross sales.
- A few states consider software or web cookies on in-state devices as a business nexus. In all cases, the sales thresholds for this nexus are pretty high.
- An economic nexus is the simplest way of determining a sales tax nexus. It's basically just sales. A business might have an economic nexus in a state if it sells over a specific amount or threshold.