Substantial Nexus does not require physical presence in a state

Nexus is the required contact between a state and a business before the state has the jurisdiction to tax the business.

In the past, physical presence was required to be taxed in the state. However, the case South Dakota v. Wayfair (2018) decided that “substantial nexus” does not require physical presence in a state. This means that sales tax can be collected on vendors who conduct a certain level of transactions within a state, setting a precedent for economic nexus. 

This Supreme Court decision overturned the earlier verdict in Quill Corp. v. North Dakota (1992), which held that the Commerce cause prevented states from collecting sales tax from companies without a physical presence in the taxing state. 

In many states, if the quantity of gross sales or number of transactions exceed a certain threshold, taxes can be collected regardless of physical presence. For South Dakota and many other states, the threshold is $100,000 in gross sales or over 200 transactions. As of May 2021, all US states except Missouri have some form of economic nexus laws, however, for states such as California and Texas, the threshold is $500,000. 

Certain states do not have a sales tax, including Oregon, Montana, New Hampshire, and Delaware. By extension, nexus taxes are not collected in those states.

In addition to economic nexus, companies can also be responsible through a “click-through” nexus, when the company meets a minimum sales threshold through an in-state referral agent. Companies who are substantially affiliated with an in-state retailer can be affected through “affiliate” nexus legislation. 

If your business meets the requirements for having a tax nexus in any number of states, you must collect, report, and pay sales taxes on products and services in each state, as well as pay state income tax on any income generated within that state.

Our offices are at your disposal for further information about this matter. Contact us.

Sources:

Bloomberg
The Balance
Sales Tax Institute
New York Times
Avalara