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Nexus: Sales Tax HotSpot #1 and Key Sales Tax Consideration

author photo of Michael J. Fleming

One of the most basic questions that a businesses has when selling into multiple states is where do we have a responsibility to collect and/or pay tax. This question usually relates to sales and use as well as income and franchise taxes.

The answer to this question is twofold. The answer for sales and use tax is:  wherever you have nexus and wherever what you sell is taxable. For income tax, the answer is a little more complex, but to start, it is wherever you have nexus and whether your income can be  sourced to the state.  OK - but what exactly is nexus?

Nexus Definition

If you look in any dictionary you will see that nexus is generally defined as a connection or link. When used in a tax context, nexus is the term we use when a company has a strong enough link or connection with a state, such that the state has the legal authority to require the company either to pay its income/franchise taxes or collect sales/use taxes on its behalf.

On the surface this sounds like it should be a simple concept. If the business is connected to the state we have to pay and collect taxes and if we don’t have that connection, we don’t. While this is true, nexus is much more complicated and once we look at what actually may or may not create this link or connection you will probably agree.

It All Starts with Nexus

If you have nexus with a state there are certain actions that state will require of the business. These include registering with the state and then collecting and/or paying its taxes. If you do not have nexus with a state then you have no worries as the state does not have jurisdiction over you for tax purposes.

However, nexus is one of the most underestimated and misunderstood state tax concepts, which makes this the number One Hotspot. Many companies and their advisors do not get this right, which can lead to costly and sometimes devastating results.

We intend this blog to be a tool that will help you better understand nexus and successfully navigate yourself into compliance. Over the coming weeks and months we will be looking at the different types of activities that may or may not create nexus. Since nexus for sales tax can be greatly different from nexus for income tax, we will concentrate primarily on sales tax.

We want this tool to be interactive so what are some of your questions as they relate to nexus? Please submit to us using the "comment" box below.

Do you have questions about MULTI-STATE sales tax - or other state/local tax issues?

Michael welcomes inquiries from SalesTaxSupport.com users. Please call - or (ideally) if time allows, use the "Request a Consultation" link on this FIRM PROFILE page to submit your question and/or consultation request.

Other recent “Sales Tax Basics” posts by Michael J. Fleming:

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Comments

2 Responses to Nexus: Sales Tax HotSpot #1 and Key Sales Tax Consideration

  • Posted by Teddi on April 5, 2016 4:20pm:

    So, lets say I am an app developer and am going to sell a game on the google play store to anyone in the US. I have a nexus in the state of SD that has a 4% tax and in a city that has a 2% municiple tax. I only need to collect taxes for those customers who buy the game while in SD right? And, if they live in same city, there is an extra 2% tax. This is what I understand from the post. Is this correct? Anyone out of state that buys, I do not have to collect or submit taxes for.

    • Posted by Author photo of Michael J. FlemingMike Fleming on April 12, 2016 3:05pm:

      Hi Teddi,

      Unfortunately, it is not that easy. First of all, there are many activities that can give you nexus, and I find that many sellers are not aware of all these activities. For example, Texas currently views the downloading of software by a customer to be a nexus creating activity. Apps are often considered a type of software. Alabama, states that simply having $250,000 in sales in the state to be nexus creating. So the first thing you want to do is make sure you only have nexus in SD.

      When it comes to determining which states tax to collect there is generally a hierarchy of known facts, that are used to determine which rate to use. While one of the facts is the place where the app is actually downloaded, this is generally not known at the time of the transaction. In situations like this the fact usually known and relied on most, is the billing address of the purchaser's credit card.

      I hope this has been helpful. If you would like to discuss your specific facts in greater detail please reach out directly.

      Mike

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