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We have a nexus in only 2 states, but drop-ship all over US. Will a paid referral program create additional nexus?

Full Question: We have a physical nexus in only 2 states, CA and NM - with products shipping and drop shipping all over the US. We collect taxes and remit them for anything shipped to NM and CA. We are hoping to start a word of mouth referral program, where we will pay previous customers up to $600/year for closed sales from a customer that they refer. Would this establish a nexus for sales tax purposes?

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Answer:

Diane Yetter photoSales tax is required to be collected by a seller who has a substantial presence - referred to as nexus - in the customer's ship to state. Nexus can be established through the temporary or permanent activities of people (employees, service people or independent sales/service agents) or property (inventory, offices, warehouses) in the state. This can include the activities of affiliates and independent contractors. A number of states have passed click-through nexus laws, sometimes referred to as "Amazon" laws. In these states, a retailer is determined to have nexus in a state if commission payments are made to an in-state resident for the referral of another in-state resident to the retailer resulting in a sale. There is typically a minimum sales threshold (often $10,000) that must be met before nexus is established. If you meet these criteria in a state that has enacted a click-through nexus law, you have established nexus in that state. You may also be deemed to have established nexus in states if the individuals you are paying a commission to are deemed independent contractors. The use of independent contractors in a state that are paid a commission have a long history of creating nexus in a state. If you have created nexus in a state, you are likely going to be required to collect tax on taxable sales into the state. If you don't have the required presence in a state, then you should not collect sales tax on the sales delivered into states where you don't have nexus. Rather, your customer will have the obligation to remit use tax on the purchase to their state. If you require assistance regarding sales tax nexus issues, YETTER is available to provide a broad range of services. Please call [Diane Yetter][d_mailto] at 312-701-1800 to discuss your requirements. The Sales Tax Institute also offers classes which review sales tax basics - through to advanced issues and best practices. Register for the Sales Tax Institute Online Course ("Introduction, Definitions and Nexus") to learn more about this challenging topic. [d_mailto]: mailto:diane@yettertax.com?subject=Regarding%20Your%20Information%20on%20SalesTaxSupport.com Don't forget about these additional NEXUS resources: Sales Tax Institute's "News & Tips" (Nexus) Diane Yetter Talks Nexus on YouTube Are you a multi-state company with a NEXUS question that we have not yet covered here - or in our Sales Tax Archives? If so - [Submit it here][submit_src]. [submit_src]: http://www.salestaxsupport.com/sales-tax-information/ask-tax-question.php If you need assistance determining where you might have a collection requirement, we can provide consulting assistance.

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