As technology continues to change, so does the moving target as to what exactly gives a company nexus within a particular jurisdiction. Although there was no significant change in federal legislation or new Supreme Court cases interpreting nexus, states continue to flex their muscles and become more and more aggressive in imposing nexus to the unsuspecting business. We often get phone calls and emails from taxpayers wondering how much activity is enough to give them the dreaded nexus with a state.
By way of brief background, “nexus” is fancy legalese meaning a connection or link. If a company has enough of a connection or link to a state, then the state can impose its laws on the business and require it to charge, collect, and remit state taxes such as sales tax. In 1992, Quill v. North Dakota was decided, which announced that having a physical presence in a state was sufficient nexus to require a company to follow a state’s state and local tax laws. In other words, if your business has an office, a warehouse, some inventory, or a person (employee and yes, an independent contractor), then it likely has nexus under the physical presence test in Quill. In our current economy, is something as small as a server enough to create the requisite nexus Quill was talking about?
It is virtually impossible to keep up with all state developments on a regular basis, however, numerous surveys are conducted to determine a state’s position on the most current nexus developments. According to multiple surveys, the most recent count is at least 36 states will impose nexus from having a web server in a jurisdiction. Of those, at least 26 will impose nexus if a company leased a server from a third party. Imagine a state determining that your company has nexus for leasing a server in a state that you may not even know exists. Also, of note, at least 16 jurisdictions take the position that nexus is created by having a cloud based provider in a jurisdiction with only a significant number of customers being billed in that jurisdiction.
For the unsuspecting retailer simply having servers in states that they don’t know about, nexus can be a looming problem from a state tax perspective. Even worse, if a company was is not registered in a state, there is no statute of limitations to cut the liability to 3 or 4 years. This can be crippling for many small and medium online retailers. If this sounds like you, then it is likely time to get an experienced sales and use tax attorney involved.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?
- Does Nexus Trail a Company After Leaving a Jurisdiction?
- Nexus Update: Washington Enacts New Nexus Standards
- New Proposed Nexus Legislation – Not Very Helpful