Sales and use tax nexus

Nexus is the connection between a business and a taxing jurisdiction, such as a state. Until that connection exists, the jurisdiction generally cannot require the business to collect or pay its sales tax.

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Nexus can come from a physical presence, and in many places it can also come from the level of sales activity.

Why nexus matters in a cost review

Sales and use tax questions are about two things: tax you may have collected or paid in error, and tax you may owe but have not handled. Nexus sits underneath both. If you have a connection to a state, its rules may apply to your sales and your purchases. If you do not, they may not.

A review of tax on purchases and sales often starts by mapping where your business has a connection. That map shapes which jurisdictions are worth examining. It can also show places where you have been charged tax you did not owe, or have a duty you had not noticed.

A plain-words illustration

Imagine a manufacturer based in one state. It sells to customers in several others. For years, it ships goods from its own warehouse and has no staff elsewhere. Then it hires a sales representative who works from a home office in another state, and it begins storing inventory with a third party in a third state.

Each step may create a new connection. The business never planned to take on any tax duty, but its activity has changed the picture. A review would ask where the business now has a connection, since when, and what that means for the tax it collects and pays.

How it shows up in a review

A partner firm that handles sales and use tax work will often start with a fact-gathering step about your operations. Questions may include where you have employees, offices, inventory or agents, and where your customers are. [CONFIRM: a partner firm supplies and approves this statement]

Two broad kinds of nexus are commonly discussed:

  • Physical nexus. This arises from things like an office, a warehouse, inventory, employees or representatives in a state.
  • Economic nexus. This arises from the volume of sales or number of transactions in a state, even with no physical presence. Many states adopted rules of this kind after a landmark court decision. [VERIFY: current thresholds and rules for each state in scope]

Use tax is the related duty that applies when tax was not charged on a purchase and the buyer owes it directly. A review of accounts payable audit records can also reveal tax paid on purchases that should have been exempt. Thresholds, exemptions and filing duties differ by state and change over time. [VERIFY: which rules apply to each jurisdiction]

If your business is in a sector with complex sales channels, the industry pages may help. See retail for one example.

Common mistakes

  • Assuming no physical presence means no obligation. Sales activity alone can create a connection in many places.
  • Overlooking indirect presence. Inventory held by others, agents and traveling staff can count.
  • Ignoring the past. A connection may have started years before anyone noticed.
  • Treating all states alike. Rules differ widely, and so do exemptions.
  • Collecting tax without a basis. Charging customers tax that is not owed creates its own problems.
  • Forgetting use tax. Untaxed purchases can leave a duty with the buyer.
  • Relying on memory. Keep dated records of where staff, stock and sales activity have been.

Warning: This page gives general information, not tax advice. Rules vary by jurisdiction and change. Speak with a qualified tax adviser about your own position.

Related terms and pages

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