The Supreme Court’s decision on June 21st, 2018 allows states to require out-of-state retailers to collect and remit sales tax, regardless of whether or not the retailer has a physical presence in that state. This is caused when a business has exposure to sales tax nexus. A business can establish sales tax nexus multiple ways. Understanding how businesses can trigger sales tax nexus is critical in order to avoid having to pay uncollected sales tax out of pocket along with interest and penalties. Common forms of nexus that can trigger the need to collect and remit sales tax include economic nexus, click-through nexus and affiliate nexus.
Economic Nexus: New form of Nexus resulting from South Dakota vs Wayfair
Economic nexus is established when a business passes a state’s economic threshold. Depending on the state, the threshold for sales and transactions needed to trigger the need to collect and remit sales tax differs. Commonly, the threshold is gross receipts from taxable sales of $100,000 or 200 or more separate transactions into a particular state.
Click-through nexus occurs when an out of state seller enters into a referral agreement with an in-state resident. For example, when an in-state referral provides a link to an out of state retailers website and then that out of state retailer pays commission to that in-state referral. In this case, the out of state retailer would be exposed to click-through nexus. Since agreements of this nature results in internet sales, the seller is required to collect sales tax.
Physical Presence Nexus
Having or maintaining an office, sales house, distribution house, warehouse or another place of business in another state constitutes maintaining a business in that state and would require the collection of sales tax.
An affiliate or subsidiary relationship with an in-state entity can result in affiliate nexus. Affiliate nexus can be established when an in-state retailer and the out of state entity share common ownership. In general, when income is derived from the in-state seller, affiliate nexus has been established, and would therefor require the collection of sales tax.
How DHJJ Can Help
In today’s marketplace, physical presence is no longer the only dominant form of nexus. Identifying if your business may be exposed to other types of nexus, such as economic, click-through or affiliate nexus can help ensure that your business is appropriately collecting and remitting sales tax.
Please contact DHJJ’s State and Local Tax group if you have questions on how your business might be impacted by calling 630-420-1360 or using the form below.