Nexus

Definition

Nexus is a legal term used in taxation to describe the required level of connection between a taxing authority and an entity. This connection gives the taxing authority the right to impose taxes on the entity. There are different types of nexus that may be relevant, including sales tax nexus and income tax nexus.

For sales tax purposes, nexus typically requires a physical presence in the taxing state, which could include an office, warehouse, or employees.

For income tax purposes, establishing nexus often requires more than just soliciting sales in a state. It generally involves having a significant or ongoing presence in the state, such as owning or leasing property, having employees, or engaging in regular business activities within the state.

Examples

Amazon and Sales Tax Nexus: An online retailer like Amazon might establish a sales tax nexus in multiple states by having warehouses and fulfillment centers in those states, which obligates Amazon to collect and remit sales tax to those states.
A Multinational Corporation: A corporation that sells products across multiple states might need to file income tax returns and apportion taxable income to each state where it has nexus. This apportionment depends on factors such as the property, payroll, and sales within each state.

Frequently Asked Questions (FAQs)

Q1: What establishes a sales tax nexus in a state?
A1: Sales tax nexus is typically established by having a physical presence in the state—this can include having an office, warehouse, employees, or regular delivery of goods in the state.

Q2: How can a business determine if it has an income tax nexus?
A2: Businesses usually determine income tax nexus through a variety of factors including property ownership within the state, employee presence, and significant economic interaction within the state. Consulting state-specific guidance or tax professionals is often necessary.

Q3: Can mere solicitation of sales lead to income tax nexus?
A3: No, mere solicitation alone is generally not enough to establish income tax nexus. Additional activities such as maintaining an office, employees, or other business operations in the state would typically be required.

Q4: Are there different nexus standards for different types of taxes?
A4: Yes, the threshold for establishing nexus can differ between state sales tax and state income tax. Sales tax generally requires a physical presence, whereas income tax may require a combination of economic presence and business activities.

Q5: How has the concept of nexus changed with the rise of e-commerce?
A5: The rise of e-commerce has significantly evolved the concept of nexus, leading to varying laws such as economic nexus thresholds based on sales volume in the state, even without physical presence, as seen in the South Dakota v. Wayfair Inc. decision.

Economic Nexus: Nexus established by surpassing a certain level of sales or transactions in a state, even without a physical presence.
Physical Presence: A tangible connection like offices, employees, or warehouses in the taxing state.
Apportionment: The process of dividing a multistate business’s income among states for taxation purposes.
State Income Tax: A tax levied by individual states on an entity’s income earned within that state.
Sales Tax: A tax on sales or receipts from the sale of goods and/or services within a state

Online References

Suggested Books for Further Studies

“State Taxation” by Jerome R. Hellerstein and Walter Hellerstein: Comprehensive coverage of state taxation, including nexus.
“Multistate Tax Guide to Pass-Through Entities” by Robert W. Jamison and Timothy P. Noonan: Detailed information on multistate taxation and nexus for pass-through entities.
“U.S. Master Sales and Use Tax Guide” by CCH Incorporated: Essential guide to sales and use tax across the United States.

Fundamentals of Nexus: Taxation Basics Quiz

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