Sales and Use Tax Nexus: What Creates an Obligation?

Sales and use tax nexus is the connection between a business and a state that creates an obligation for the business to collect and remit sales tax. The U.S. Constitution requires this link to be established before a state can legally require a business to handle its sales taxes. For any business selling to customers in various states, understanding nexus determines where tax responsibilities exist. Failing to comply with these obligations can lead to significant financial penalties and legal issues.

Understanding Physical Presence Nexus

For many years, the standard for determining a sales tax obligation was physical presence, meaning a business needed a tangible footprint within a state’s borders. The U.S. Supreme Court upheld this principle for decades, making it a predictable measure for businesses. Even with the introduction of newer standards, these physical presence rules remain in effect and continue to create nexus.

A variety of activities and assets can establish a physical presence. Having a permanent location, such as an office, warehouse, or retail store, is the most direct way to create this connection. Storing inventory within a state also establishes a physical presence, including using a third-party fulfillment service. For example, if an online retailer uses a service like Amazon FBA to store its products in a state’s warehouse, the seller has a physical presence there.

The actions of people representing the business can also create a physical presence. This includes having employees who work from that state, even remotely, or sales representatives who travel into the state to solicit sales. Even temporary activities can trigger nexus, such as attending a trade show to exhibit products and take sales orders.

The Rise of Economic Nexus

The landscape of sales tax nexus was altered by the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. The ruling eliminated the requirement that a business must have a physical presence in a state to be subject to its sales tax laws. This decision paved the way for states to enact laws based on economic nexus, which establishes an obligation based on a business’s economic activity within a state, regardless of physical presence.

Following the Wayfair decision, states adopted economic nexus laws with specific thresholds. The two most common measures are the total revenue generated from sales in the state and the total number of separate transactions with customers. Once a remote seller exceeds a state’s threshold, it is required to register, collect, and remit sales tax.

The thresholds for economic nexus vary significantly from one state to another. For example, the South Dakota law at the heart of the Supreme Court case established a threshold of $100,000 in gross sales or 200 separate transactions within a year. In contrast, a state with a larger economy might set a higher revenue threshold, such as $500,000, and may not have a transaction count threshold. This variation requires businesses to track their sales activity for every state where they have customers.

Other Connections and Modern Sales Tax Rules

Many states have enacted marketplace facilitator laws, which shift the sales tax collection responsibility from the individual seller to the operator of an online marketplace, such as Amazon, Etsy, or eBay. The marketplace facilitator is required to collect and remit tax on all sales made through its platform. While this simplifies compliance for those sales, it does not absolve the seller of all responsibility. If the seller also makes sales through their own website, they must still track their nexus-creating activities for those sales.

Other business relationships can also create a sales tax obligation. Before the Wayfair decision, states developed standards like “affiliate nexus” and “click-through nexus” based on relationships with in-state businesses. While economic nexus laws have largely superseded these older rules, they have not all been repealed. In some states, these laws can still create a tax obligation, so businesses must be aware of how in-state affiliations might impact their tax duties.

Information Required for Sales Tax Registration

Before a business can register for a sales tax permit, it must gather a set of documents and information. Having these details on hand ensures a smooth registration process. Key information includes:

• Federal Employer Identification Number (EIN)
• Legal business name and any “Doing Business As” (DBA) names
• Business structure (e.g., LLC, corporation) and the date it was formed or incorporated
• Personal information for owners or corporate officers, including full names, addresses, and Social Security Numbers
• The business’s primary address and phone number
• A North American Industry Classification System (NAICS) code that describes the company’s primary business activity
• Bank account information for tax payments
• The date that business activities began or that nexus was established in the state

The Sales Tax Registration Process

With the necessary information gathered, a business can register for a sales tax permit. The most common method is through an online application on the website of the state’s Department of Revenue or equivalent tax agency. These portals guide businesses through the application process.

For businesses with nexus in multiple states, the Streamlined Sales Tax Registration System (SST) is an efficient option. The SST allows a business to register in any of its 24 member states through a single, centralized application. The service is free, and businesses can choose which member states they wish to register in.

After submitting the application, the business will receive confirmation from the state, including a sales tax permit or license number. The state will also provide information regarding filing obligations. This includes the assigned filing frequency—monthly, quarterly, or annually—and the due date for the first sales tax return and payment.