Understanding nexus and sales taxes

What do you need to know about nexus?

States across the US are dealing with budget shortfalls and a popular new law that seems to be spreading is what the New York Post has called the “Amazon Tax”. Sales tax and all state tax is impacted by nexus in a state. To help understand the concept, let’s start with Max who lives in California and wants to buy a new flat screen television. Max goes down to Walmart, finds the perfect TV and pulls out his credit card. Included in the purchase prices of Max’s new TV is sales tax which Walmart collects and sends on to the state of California.

In fact just over 26% of California’s total state revenue comes from sales tax. Suppose Max thinks better about the purchase and instead goes back home to search for televisions online. Max in fact finds the exact same TV online at Bob’s television and pet emporium in El Paso Texas. Since Bob is in Texas and Max is in California, Bob does not charge Max sales tax, because Texas, like every other state, does not require companies to collect sales tax on items that are sold outside of the state.

Now technically Max is required to report his purchase to California and pay the sales tax that he would have paid if he had purchased the TV at Walmart. Of course Max is probably not going to do that, because nobody else in California or in any other state does it. California doesn’t like it, but they don’t really want to track down every Max who buys a TV and hound him for sales tax. The state would much rather go after Bob who sells a 100 televisions a month to California residents and make Bob pay the tax on the TVs he ships into their state. Essentially it is much easier to collect tax from Bob, plus Bob doesn’t get to vote in California elections, so who cares if he’s mad at state government.

The only thing Bob has going for him is a legal concept called nexus. Nexus basically means that Bob doesn’t have a physical business presence in California, so California has no legal right to require him to collect or pay tax to their state.  Since 1992, when the US Supreme Court ruled on Quill Corp. vs The State of North Carolina, a state must establish that a business has a physical connection, such as employees, a store front, a warehouse or other physical assets located in the state to establish nexus in that state.  Simply directing marketing or shipping products via common carriers is not enough of a physical connection for the state to make a business subject to state taxes.

Online E-tailers, eBay and Etsy sellers and anyone who ships products to out of state customers should keep good records of where your income is generated, because the concept of nexus is continuing to evolve as online sales continue to grow.  If you have questions about how your online business may be impacted by nexus and sales tax for sales to customers outside your state, feel free to contact us for a free 30 minute no-cost consultation.

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