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Nexus Perplexus... How States View Physical Presence

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For years, states have attempted to assert a sales tax collection responsibility on businesses who have sold across state lines. The more aggressive of those efforts have invariably ended up in the courts. Whether it be the earlier US Supreme Court cases like Miller Bros. v. Maryland, 347 U.S. 340, 344-45 (1954), or National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 756-57 (1967), or the most significant sales & use tax nexus case to date, Quill Corp. v. North Dakota, 504 U.S. 298 (1992), with sales tax the question of nexus always came down to, “is there a physical presence.”

The question today, more directly, seems to be, “what is physical presence?” Is it simply an independent contractor doing repairs, or a website with a link directing in state customers to an out of state vendor? The answer is of course, “it depends on the state.”

This blog is about connections to taxing jurisdictions and when those connections have risen to the level of “substantial nexus,” as defined by the United States Supreme Court. Sound complicated? It is, but in this blog we have the opportunity to discuss your situation and individual facts, explore the alternatives, and if possible, answer the question, “will the state say that I have nexus?”

John has been in the field of state taxation for over 20 years and has worked in both private and public tax environments. John's specialties include - income tax nexus, apportionment, business vs. non-business income, sales and use tax nexus, application of state sales and use tax rules - and all things state tax related.

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43 Responses to Nexus Perplexus... How States View Physical Presence

  • Posted by Susan on February 27, 2015 10:08pm:

    I didn't see my post so I am trying again. I work from home as a customer service rep. for an online business (not a sales person though sometimes customers do call into through a VOiP phone and place an order). Does the company create a nexus in all states that reps work from their home. We do file sales/use tax in states in which we have our corporate office and warehouses. Thanks Susan

    • Posted by Author photo of John DalyJohn Daly on March 1, 2015 11:32pm:

      Are these reps employees? If they are employees they will create S&U tax nexus in most (not all) states. Independent contractors may create nexus also, but there are different things I need to look at to answer the Q re: contractors.
      If you want to chat just call my cell @ 732 503-0178. I am also happy to answer your Qs here too.

      • Posted by Susan on March 2, 2015 5:07am:

        Hi John, Thank you for getting back with me. We are thinking of using ind. contractors who select their own hours working from their home. Right now we are hoping to hire in PA and NV. Do you have info on those states regarding an employee or ind. cont. Susan

        • Posted by Author photo of John DalyJohn Daly on March 2, 2015 5:56am:

          There are many considerations that need to be made here. It sounds to me like you will have nexus regardless of whether or not they are employees or contractors if they are going to service customers. I would not recommend making a business decision like where to hire independent contractors without speaking with your paid advisor. It would not be fair for me to try to advise you with my limited knowledge of your company. Take a look at PA's website - Search for the form REV-203D and you will see how specific PA and other states get when they start looking at a company to see if they have nexus. I have many of these types of questionnaires in my "library." PA's phone number is 717 783-6031 or 717 787-1064. Give them a call and see what they tell you when you inform them of your plan. Don't give them your company name and ask for a statute or regulation or ruling to verify what they tell you. Also, sales tax is a trust fund tax. If you don't get it right the owners and officers of the company will be personally liable for the tax. Be careful.

          • Posted by Susan on March 3, 2015 2:50am:

            Thank you and I understand completely. I will give them a call. Susan

  • Posted by Marilyn on February 16, 2015 12:10am:

    I am a manufacturer in GA with no nexus an any other state. I am selling product to a buyer that has nexus in South Carolina. The product is shipping common carrier to the job site in SC. Buyer also has nexus in GA. What sales tax if any do I collect?

    • Posted by Author photo of John DalyJohn Daly on March 1, 2015 11:26pm:

      Hi Marilyn. You do not have to worry about sales tax if your product is shipping common carrier from GA to SC and you have no nexus in SC. If you (anyone representing your company) never enter SC for business purposes for any reason, you will not have nexus. If you do enter SC (e.g. sales calls, warranty work, etc.) you will probably have S&U tax nexus.

  • Posted by Jeff on December 1, 2014 9:23am:

    Hi, John. Thanks for this informative thread! I've asked my California employer if I can start telecommuting from one of the Carolinas so that I can move closer to family. We're an online gaming company and we sell "virtual goods" to our customers all over the world, including in every US state. I have a non-sales job in customer service at the director level, although I sometimes handle escalations from customers who may have billing issues.
    Would my presence at a home office establish nexus in either of the Carolinas? My company is obviously looking to not have to pay sales tax as part of my move. They only currently create nexus in California since that's where the majority of our employees are located.
    Is one of the Carolinas more favorable than the other when it comes to this situation?
    Thank you!

    • Posted by Author photo of John DalyJohn Daly on December 7, 2014 12:47pm:

      Hi Jeff. FYI One SC ruling says if an "Out-of-state seller has an agent, salesman, representative, independent contractor, or employee
      operating in South Carolina, either permanently or temporarily" sales tax nexus exists. Your presence in SC would create sales tax nexus.
      NC seems to be a little less fixated on the simple presence of an employee. If however you are a customer service person dealing directly with customers in NC, I would presume the state would conclude you have sales tax nexus.

  • Posted by celia on October 24, 2014 8:22am:

    Would anyone know what each states policy is on the number of days in their state to trigger nexus?

  • Posted by Kimberly on May 1, 2014 9:26am:

    I am a small business owner living in tx. I do not have a solid location but i do sell online. I dont have a store front i work out of my boyfriends house. Would i need to charge tx state tax to my customers or no?

    • Posted by Author photo of John DalyJohn Daly on May 5, 2014 1:16am:

      Absolutely yes. You have a physical presence in TX. You have income and S&U tax nexus.

  • Posted by Carl on March 26, 2014 7:16am:

    I just started my company in New York, i am a designer and selling my swimwear on my website, i have no employees and i work from my apartment.
    Do i have to charge sales tax on my website? What is physical presence?

    • Posted by Author photo of John DalyJohn Daly on March 26, 2014 7:35am:

      Yes, but only on deliveries to NY customers. If you have agreements with other websites to direct traffic to your website you may have nexus elsewhere as a result. As you probably know NY is like the wild west with S&U tax. each county has its own rules with clothing taxability and its own tax rate as well. The link below should shed some light on the taxability of clothing in NY. Making and selling anything besides swim wear? Did you set up an LLC? Good luck!

  • Posted by Sherri on February 21, 2014 1:16am:

    We have a client in Oklahoma. He has sold some product to a client in New Mexico. It is being delivered by common carrier. It is my understanding he is to collect Oklahoma sales tax. He believes he should collect New Mexico gross receipts tax. My client has no employees or sales people in New Mexico. Only in Oklahoma. Are either one of us correct?

    • Posted by Author photo of John DalyJohn Daly on March 15, 2014 12:23am:

      Definitely not OK sales tax. Sales tax is based on the delivery location and nexus. If your client has no nexus in NM he does not need to collect there either. If he does have NM nexus that is the tax he should collect and remit. The only time he may have an issue in NM if he has no nexus is if the drop shipper had nexus there and forces your client to either produce a resale cert accepted by NM or pay the tax himself. That is a common problem with drop shippers.

  • Posted by Lee on January 28, 2014 12:51am:

    If we have an employee living in a state (eg. New Hampshire) where we do not have a business location but travels to work in a state where we do have a business location (eg. Massachussetts), do we need to file Sales & Use tax in the state of his residence?

    • Posted by Author photo of John DalyJohn Daly on January 31, 2014 2:00am:


  • Posted by Stacey on December 9, 2013 4:14am:

    Hi John, I have a client who is an IC. She sells print work for two unrelated print companies. She is located in Idaho, and one of the companies she sells for is located in Oregon. That company is concerned that our client might be creating a nexus in Idaho. Our client has control of her time and how how generates sales. The sales/orders are referred to the printer and they take it from there. Does this constitute creating a market in Idaho?

    • Posted by Author photo of John DalyJohn Daly on December 31, 2013 3:49am:

      Sounds like she is creating or maintaining a market for the printer if she is soliciting sales in ID.

  • Posted by Jennifer on October 22, 2013 5:30am:

    If we have employees/and or independent contractors going into states (non resident states for them) installing machinery or making repairs, is this creating nexus. It might be 1 time per year or 1 time every 3 years or multiple times each year. It depends on sales. In other words, it's not known when or if they will be entering a state to make the repairs or installation. If one visit in this capacity creates nexus in a state, but going forward we never enter that state again for installation or repair - must we continue to collect sales tax?

    • Posted by Author photo of John DalyJohn Daly on October 24, 2013 1:07am:

      In many states (not all) that will create nexus. Here is the thing though. You need to determine how much risk you are willing to live with. If you think your activity may or may not create nexus, you may want to do an exposure analysis to see how much you really have at risk before you worry too much about nexus. I am not saying you should only register, collect, and remit where you want to or where you think it is worth it. I am just suggesting that you do the exposure analysis if your activity is borderline. If you want more specifics, call me. I don't want to get my firm or this website in hot water.

  • Posted by Bob on October 8, 2013 3:25am:

    The company I work for sells products in all 50 states. We sell wholesale to retailers for resale and use independent reps. These reps travel each state on varying schedules. All product is shipped to the retailer from our warehouse. We require and maintain Sales Tax exemption certificates from these retailers. We collect taxes for CA & WA
    We also sell product direct to consumers via our website. We do not currently collect sales tax except the above mentioned states.Our sales reps do not have any contact or service any of our direct to consumer business.
    In your opinion, does the independent rep relationship with our wholesale customers create nexus relative to the consumer business?

    • Posted by Author photo of John DalyJohn Daly on October 8, 2013 5:04am:

      Yes. If wholesale and retail all happen under the same FEIN, yes. If you have Independent Contractors (ICs) in states/cities soliciting sales and violating public law 86-272 (e.g. accepting and approving orders for you, accepting payments, etc. ), they will also create income tax nexus for you.
      If you create a different entity and sell the internet stuff through that entity it will eliminate nexus in some states, but not in others.

  • Posted by Elizabeth on September 13, 2013 5:39am:

    Hello John,
    I just found this blog and read through some articles, as I seem to be having a debate with an account I've been talking with. I'm in MD as a sole proprietor and have a monthly retainer to a company in MA (defined for less hours than a full time worker). I support their technical issues (mostly evaluating and delegating to the right vendor than actually fixing it myself) or handle technical project management right now. There had been talks of possibly taking on supporting (fix, maintain, enhance) their inhouse proprietary software.
    As a contractor, I'm fairly confident that I am not creating a nexus for this company, but if I were to become a remote employee would that be the same case? The company itself sells to consumers via mail order and web and has no presence outside of MA at all. I would not be conducting sales or marketing, just supporting existing business structures. What would be your take on this?
    Thank you for your time!

    • Posted by Author photo of John DalyJohn Daly on September 24, 2013 8:18am:

      Hi Elizabeth. As an independent contractor you will not create nexus if you do not work directly with their customers and they do not "control you". If you work directly with their customers in MD you would be creating or maintaining a market for them in my estimation and as you know that means nexus. If you become an employee you can get closer to creating income tax/sales tax/payroll tax nexus for them. If they sell tangible personal property, but you have nothing to do with their customers and you pay for the home office and equipment, you will be OK for income tax nexus but not sales tax or payroll tax nexus. I attached a copy of a MD ruling that deals with income tax nexus. Take a look. Let me know if you have anymore questions. My phone # is 732 503-0178. Please call if I keep you waiting too long here with my responses.
      Maryland Administrative Release No. 2, 09/01/2009
      1. Business Location. A “business location” includes, but is not limited to, a repair shop, parts department, purchasing office,
      employment office, warehouse, terminal, meeting place for directors or other personnel, sales office, permanent sample or display
      room, research facility or a recreational facility for use of employees or customers.
      A residence of an employee or representative is not ordinarily considered a “business location” of the employer unless the facts
      indicate otherwise. It would be considered a business location under one or more of the following conditions: A portion of the
      residence is used exclusively for the business of the employer, the employee is reimbursed or paid a flat fee for the use of this space
      by the employer or the employee's phone number is listed in the telephone directory under the name of the employer; or if the
      employee uses his home to store supplies, equipment or samples furnished by the employer, or the space is used by the employee
      to interview prospective employees, hold sales meetings, or discuss business with customers.
      2. Representatives. If a person is subject to the direct control of a foreign corporation, he or she is a representative and may not
      qualify as an independent contractor. A person may be considered a representative even though he or she may not be considered an
      employee for other purposes, such as the withholding of income tax from commissions or other amounts paid to the person.
      3. Activities. Under Public Law 86-272, the following activities in Maryland do not cause an entity to be taxable.
      a. Employees or representatives soliciting orders for tangible personal property which orders are sent outside this state for
      approval or rejection.
      b. Solicitation activity by non-employee independent contractors, conducted through their own office or business location in
      c. Delivery of goods to customers by the corporation in its own or leased vehicles from a point outside of Maryland.

  • Posted by Melissa on July 29, 2013 4:44am:

    We have employees who live in the following states: CO, CT, GA, NJ, OK, VT, VA. They are traveling teachers who teach payroll processes in various cities. We also have one telecommuting employee in North Carolina who performs adminstrative functions. Have we created Nexus in those states under the above conditions?

    • Posted by Author photo of John DalyJohn Daly on October 24, 2013 4:15am:

      I would say yes. If you have employees teaching in states and you also have customers in those states you will have nexus. I think you are ok in NC though because that state seems to be lenient with telecommuter employees. That treatment could change in the future though.

  • Posted by Mike on June 28, 2013 7:04am:

    Hello John
    I am working with a client to establish a new online sales channel. In setup, they have requested I implement matching sales tax collection to their extant practices. This is no difficulty. However, I think they may be misinterpreting nexus based on a misunderstanding of two individual state's rules. They are currently collecting and remitting at a flat statewide rate for both VA and IL despite no employee location presence and no stored inventory in either state. VA's local rate is 5%, so the rate calculation method is clear. the rate they are remitting to IL is the state rate ONLY with no destination-based adjustment to include local jurisdiction rates. This presumably reflects IL's origin-based system; since they don't have a local presence, there's no local rate. My concern, however, is without a physical or inventory presence, on what grounds is nexus cited and claimed? The traversal of the inventory units in shipment?

    • Posted by Author photo of John DalyJohn Daly on July 1, 2013 3:49am:

      Hi Mike. If you have no payroll or property in a state and no employee or independent contractor enters the state (e.g. to solicit sales or do repairs) there is "generallly" no need to collect and remit. Sometimes you register, collect and remit anyway because you may have a government agency as a client and they make you register or sometimes your drop shippers make you register or they will refuse to ship for you into certain states. I would talk to your client and find out exactly why they registered and are complying.

  • Posted by Tim on April 21, 2013 11:04am:

    Hi John,
    I am a sole proprietor with residence in Nevada. My business is teaching and consulting. I also have an instructional video that I will be selling online and in-person after classes, appearances, etc. Most of my business is out of state, mainly Illinois in which I pay state income tax on my contracted labor. Am I required to collect sales tax on behalf of Illinois and other states when I sell my videos in-person?
    Thank you,

    • Posted by Author photo of John DalyJohn Daly on April 22, 2013 12:22am:

      Hi Tim. No doubt that you have to collect and remit on those sales to IL residents. With other states, after you have traveled there a couple times and created a physical presence/nexus and market for yourself, you should register, collect and remit. The decision to register and comply is also partly driven by business considerations. If you do a one 1 day seminar in a state and sell a couple videos and don't plan to go back, some states will want you registered and some won't. Think twice before you lock yourself into a filing requirement.

  • Posted by Bobbi on April 18, 2013 7:43am:

    Hi, John, Following up on Kimberly's question about "how do we figure out if we have established nexus in each of the 50 states". Our company will be sending repair technicians into several states this year. In Ohio, for instance, a rare, non-recurring visit by a service technician will not establish nexus. In some other states, I am sure a single visit would be sufficient.
    Can you recommend a source that provides a comprehensive listing of the threshold for establishing nexus via a physical presence in all of the 50 states?

    • Posted by Author photo of John DalyJohn Daly on April 18, 2013 11:00pm:

      One more comment. I see more and more that states offer a very comprehensive set of rules, cases, guidance on their own websites for anyone eager and willing to do their own thorough research. I have at times not been satisfied with the answers CCH and RIA have given me and resorted to bing (internet search engine) searches and found enough info to make me more comfortable reaching a decision. Technology is bringing incredible resources free to the fingertips everyone.

    • Posted by Author photo of John DalyJohn Daly on April 18, 2013 10:54pm:

      Bobbi, I use both RIA and CCH. Both are pretty expensive, but my firm pays! Both have good state by state report capabilities, but you have to be very careful. I often use the charts to start my research, but I never use only the chart because there are always specific facts (e.g. contract terms) that make each situation unique. The charts disregard those unique facts and sometimes lead you down the wrong path.

  • Posted by Kimberly on March 20, 2013 6:30am:

    Hi John,
    We are a small Canadian company that occasionally (perhaps 25-30 days annually) provides training to professional engineers in various states. We do not have any employees or any physical presence in the US, nor do we make regular visits to any state. This year we have had enquiries from companies in Michigan, Alabama and Ohio. How do we figure out if we'd be creating a tax nexus in a state by providing training to companies in that state? Thanks shedding some light on this very confusing topic!

    • Posted by Author photo of John DalyJohn Daly on April 11, 2013 4:05am:

      Hi Kimberly. Apologies for taking so long to respond. This is tax season for us tax pros in the US and we are pretty busy trying to get the tax returns out the door :)
      In OH you have no nexus unless your payroll expense incurred in the state hits $50k or your revenue earned from OH customers hits $500K. Even if you meet those thresholds, your first 1million in OH revenue is exempt.
      In MI you don't need to file until your sales to MI residents/businesses hits $350k even though you may have employees in there temporarily.
      With AL the standards are not clearly defined so I would presume that AL would say you have nexus the minute you are in the state performing services.

  • Posted by Debbie on June 25, 2012 7:47am:

    Regarding MA, our CA headquartered company has recently hired an employee who will serve in an administrative capacity. It has been agreed that he will not relocate to CA. While he is not in a sales capacity, we do make sales into MA. Can we avoid sales tax nexus?

    • Posted by Author photo of John DalyJohn Daly on June 25, 2012 8:29am:

      Mass. Gen. L. § 1 says that having one or more employees located in the commonwealth creates sales tax nexus. You are in for both tax types (income and S&U). I would register and start complying.

  • Posted by June on June 9, 2012 7:59am:

    Hi John! My question is, would a company who provides repair, installation, and technical support services for customers who purchase equipment that is (1) exempt or (2) not exempt depending on the customer, would those services create nexus for use, income, and franchise tax purposes in all states.

    • Posted by Author photo of John DalyJohn Daly on June 25, 2012 8:22am:

      Hi June. If you have employees in states performing repairs and installations, you will have nexus for all tax types. Don't just start filing though. How long have you been operating in these states?

  • Posted by Albert on January 15, 2012 11:42pm:

    The company I work for, _________, Inc. is a school award manufacturing company. We are a wholesaler/manufacturer. We have salesman in 5 states (PA, VT, MI, IL, MA). The salesmen deal only with schools. Each salesman also have their own school awards company, we just provide product for them. When salesman get orders from schools, we handle the manufacturing/packaging/shipping directly to the school.
    We decided to create a website to start handling online retail orders. We are located in NY and we collect sales tax on web orders depending on county as required by NYS. We have also implemented California tax as well.
    So the question is, do we have nexus in those 5 states and should we be collecting tax on web orders from those states.

    • Posted by Author photo of John DalyJohn Daly on January 16, 2012 2:17am:

      Hi Albert. Fyi I changed your comment a little to take out your company name. You never know, but there might be some "friendly" state tax auditors monitoring the site. I also took out your email address because crafty auditors can figure out who your employer is by looking at your email. Always remain anonymous on the internet. They are out there Albert, watching and waiting! :)
      To start, you most likely will have sales tax nexus in the states you mentioned. You will also have to worry about nexus with those states' other taxes as well, e.g. income/franchise/gross receipts taxes. You may be OK for income tax purposes if your Independent contractors (ICs) do not accept and approve orders. As long as the orders are going back to the head office for approval the ICs will not create income tax nexus for you if they only solicit. However, having ICs present in a state creating or maintaining a market for your company, will almost always create sales tax nexus. They will also likely create Michigan Business Tax nexus.
      I have some questions: 1) Are your ICs taking and approving orders? 2) Do they carry consigned goods? 3) How is your company a "wholesaler" if they sell awards to schools? I would think that schools would be end users. 4) Does your company make sales to customers in states like NJ, CA, CT, CO, OH, WA State? Those are "economic nexus" states (see below). 5) What type of entity is your employer (c corp, s corp, LLC, etc.)? Entity type matters sometimes.
      Economic Nexus is when a state imposes an income/business tax on an out‐of‐state taxpayer after the taxpayer exploits the economic market in that state. In other words, when an out of state vendor makes sales to customers in a state, income/business tax nexus can be created, even though the vendor has no property, employees, or agents located in the state.
      Albert, I get plenty of new clients with nexus who only use ICs and also generate sales via a web site. There are specific things to look at in making a nexus call. Once you deem that you have nexus and back years' exposure, there are also very effective ways to contact those states, come into compliance, and avoid penalties. There is a lot to consider. I would not advise going at this alone if you do not have experience.
      A warning: There are a lot of "CPAs" out there who are not experienced in these matters. Many do not even think about nexus and many others readily conclude that you automatically create nexus if you sneeze across the border (slight exaggeration). Every business has its own unique facts.
      I will wait for you to answer my Qs…..


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