What Is Nexus & Why Does It Matter?

Over the past few years, many states have become more aggressive in their collection of income and sales/use tax. It seems that each year several new states publish updated or revised rules and regulations that define when a company has nexus in their state. For Georgia business owners with a physical presence outside the state, it’s likely this term in very familiar. Others may not be as acquainted with the term and its meaning, but it is essential to understand because it determines if/where the company owes state(s) (sales, income or other) taxes for qualifying economic activities. While the rules and regulations defining nexus and corresponding tax liabilities vary by state, it’s important be aware of nexus and its potential impact on tax planning and other activities. To help clients, prospects and others, Wilson Lewis has provided a summary of the different nexus types that can apply to companies below.

Nexus Essentials

Nexus is a legal term used to describe the amount and degree of a taxpayer’s business activity that must occur within a state before they become subject to state income, sales, franchise or other tax types. This means that when a nexus exists, a company is required to complete and submit an income tax, sales tax or other type of tax return and submit corresponding payment where required.

Triggering a Nexus Obligation

There are several situations under which a company could trigger a nexus obligation. While the rules vary by state, the general criteria by which nexus can be created include: having inventory, leased property or employees in a state, accepting or soliciting orders from another state (speaks to online or “Amazon” nexus), delivery of a product by company vehicles and the use of a web hosting server or sharing space on a third party server in another state.

Types of Nexus Classifications

• Physical Nexus – This occurs when a company has a temporary or permanent physical presence in a state, which may include physical inventory and a warehouse, equipment, offices or employees located within the state. Temporary presence can result from traveling employees visiting a state to meet with customers or prospects, attend tradeshows or even where inventory is consigned in warehouses.
• Click-Through Nexus – This occurs when a company meets a minimum sales amount resulting from referrals made by an in-state affiliate (Amazon, Overstock.com, etc.). Note that these affiliates are not employees or independent contractors of the company. This means that an online retailer could have a nexus responsibility in multiple states depending on where affiliates are allowed to be based. Currently there are more than 20 states that have a click-through nexus law in effect.
• Economic Nexus – This occurs when a company passes a “presence test,” which generally involves assessing property, payroll or sales within a state. In certain circumstances it can be a combination of the three. Currently there are over 40 states that have an economic nexus test for outside companies.
• Substantial Nexus – This occurs when a company has a significant connection to a state. Most commonly a company has substantial nexus if they have a physical presence, although there are many others factors used to determine this type of nexus.

Contact Us

Nexus is assessed on a state-by-state basis as no federal regulations exist to provide a uniform definition and application of the status. Unfortunately, business owners have to determine if nexus exists in each of the states where they conduct business, send employees or have sales. If your company would like assistance with determining nexus or managing other state tax liabilities, Wilson Lewis can help. For additional information, please call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.