Nexus refers to a state’s ability to collect from companies. A core part of the Wayfair decision, online sellers have needed to react to the 2018 decision quickly, as states began enforcing the law quickly. But 2020 may add more challenges to the way nexus is determined—and states facing revenue shortfalls may be incredibly aggressive in enforcing the law this year.
Following part one of this series on two common ‘new’ nexus approaches, we would today like to explore the other approaches states may use to determine you are responsible for calculating, collecting, and paying sales tax. From the initial physical presence laws to things such as non-collecting seller use tax, affiliate tax, and click-through tax, these nexuses may impact you differently.
For more on our sales tax series, check out our look at the states who have been the most aggressive, the SALT problems put on businesses as a result of lockdowns, and our look at the challenges companies are still facing. Be sure to check out part 1 discussing the most common approaches states are taking including economic nexus and marketplace facilitator laws.
Non-Collecting Seller Use Tax: Informing Customers of Burden to Pay
Not having to collect sales tax in a state doesn’t necessarily mean you’re entirely off the hook for sales and use tax. A different approach to the sales tax nexus, these put the burden of calculation on sellers and third-party marketplaces while requiring these sellers to notify customers of their obligations to report and pay use tax.
Much like the thresholds set for sellers discussed in our economic nexus section, these are triggered at a level determined by the state. According to Avalara, roughly a dozen states have these laws in place and three have had these in the past prior to repeal. Generally, this requires non-collecting sellers who cross thresholds to do the following:
- Notify customers of their obligations to report and pay use tax since sales/use tax was not collected on their purchase
- Provide an annual purchase summary to customers
- Send an annual customer information report to the state tax authority
See more about how each state approaches this in the Avalara State-by-State Non-Collecting Seller Use Tax Guide.
Key Takeaways: If you don’t collect, communicate with your buyers.
Driven in part by the initial Quill decision, Affiliate Nexus was one of the earliest approaches to impose a sales tax collection obligation on a business. Called a ‘creative response to the physical presence limitation’, affiliate nexus laws looked at ways to connect a seller to a state in any way possible.
Under affiliate nexus laws, an out-of-state business establishes a physical connection through in-state affiliates, employees, representatives, or other entities. For example, an Illinois-based firm with employees in Wisconsin may have created a nexus—but the challenge is not based on threshold, but on the definition of “relationship.”
For example, Arizona allows affiliate nexus to be established when an out-of-state seller uses independent contractors or other non-employee representatives in the state to establish and maintain a market for the out-of-state seller—but only if the representatives are in the state for more than two days per year, advertise/cross-promote for the business, or by taking orders/accepting returns on behalf of the business. Other states may set thresholds, determine this based on contracts, or the like.
Like physical presence, this is going to be one of the more complicated laws sellers will need to understand in 2020, especially those whose employees commute across state lines.
Key Takeaway: Employees, contractors, and other stipulations could expose you to sales tax liability, but laws are incredibly diverse.
Another nexus law considered ‘creative’ by Avalara, click-through nexus laws establish a physical connection to a state if an out-of-state business establishes agreements to reward persons in the state for directly or indirectly referring potential purchasers through links on a website. Oddly enough, click-through nexus is something marketers refer to as affiliate advertising, which only adds to the confusion.
More than 20 states have click-through nexus laws, which may now be easier than ever to enforce—and again will put an onus on sellers to find out how COVID lockdowns have impacted this. With lockdowns now hitting the point where a seller may have triggered “resident status” by owning property in and living in a state for more than roughly 180 days, knowing where your click-through money is coming from is going to be a complicated approach.
Key Takeaway: Know where the people who link to your website live and whether they are in a state with click-through nexus.
Physical Presence Laws
The original approach to nexus—and another perplexing one in the wake of COVID, physical presence could mean a variety of things to different states. Though the most common form of physical presence is a brick-and-mortar location or storefront, physical presence may also come into play as a result of employee activities, payroll, property, performance of services, or trade show attendance.
Outside of brick-and mortar sales, physical presence is most commonly something as simple as storing inventory in the state (i.e. merchandise owned by Fulfillment by Amazon (FBA) merchants, triggering marketplace facilitator laws). Another way this comes through is event or trade show attendance, in which attendance for the purpose of making sales or taking orders may establish nexus.
Another way a state can determine nexus is “the regular presence of traveling salespeople or representatives.” If you can’t tell, regular presence by representatives is going to be a touchy one for companies on the border of two states. For example an employee who lives in Wisconsin but traveled to a company in Illinois for work may now be considered a representative in the state of Wisconsin.
With all but five states having rules establishing physical presence nexus, even if you found yourself able to avoid nexus in any other category, this may be the way they get you.
Key Takeaway: Storefront is the first determining factor, but stored inventory, trade show attendance, or employees working from home on the other side of the border may trigger this.
Planning to Pay: Prepare for New Sales Tax Approaches
With so many different ways of approaching sales tax, states will be a bit more aggressive in the coming years. Enforcement will be a top priority for states who have seen decreasing revenues and increasing online transactions in the wake of lockdowns, making this a top priority for businesses.
Be sure to check out part 1 of this series, in which we explore economic nexus and third-party marketplace laws.
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