State Nexus for Sales Tax

Nexus refers to a connection or presence in a state that gives the state authority to require a business to collect and remit sales tax on transactions within that state. Historically, physical presence, such as having a store or warehouse in a state, was the primary factor in determining nexus. However, with the rise of e-commerce and remote sales, the physical presence requirement has become less clear, leading to confusion for both businesses and states.

In 2018, the Supreme Court of the United States issued a landmark decision in the case of South Dakota v. Wayfair, Inc., which changed the rules for establishing nexus. In this case, the Court overturned the physical presence requirement and ruled that a state can require a business to collect and remit sales tax if the business has “economic nexus” in the state. Economic nexus is based on the number of sales a business has made in the state, or the number of transactions it has completed in the state, regardless of whether it has a physical presence.

Following the Wayfair decision, many states have enacted economic nexus laws, which generally require a business to collect and remit sales tax if it has a certain amount of sales or transactions in the state. The threshold amounts vary by state but are typically around $100,000 in sales or 200 transactions per year.

Foreign vendors selling goods or services into the United States may also be subject to economic nexus rules. For example, a foreign vendor that sells products into the United States through an online marketplace may be deemed to have economic nexus in multiple states based on its sales in those states.

The implications of the Wayfair decision and economic nexus rules for foreign vendors are significant. Foreign vendors may be required to collect and remit sales tax in multiple states, even if they do not have a physical presence in those states. This can create a significant compliance burden, as foreign vendors must track their sales and transactions in each state and register for sales tax in each state where they have nexus.

To ensure compliance with state sales tax rules, foreign vendors should work with a tax professional or software provider that can help them track their sales and transactions and manage their sales tax obligations. By understanding and complying with state sales tax rules, foreign vendors can avoid costly penalties and maintain good relationships with their customers in the United States.

To learn more about tax implications and requirements by province, click here. For further guidance on how the state sales nexus rules may affect your business’s sales to US customers, it is recommended to consult with your tax advisor or reach out to RLB’s US Tax Team.