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Understanding Nexus

The term nexus is used in tax law to describe a situation in which a business has a "nexus" or presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state. Nexus describes the amount and degree of business activity that must be present before a state can tax an entity's income. If a taxpayer has nexus in a particular state, the taxpayer must pay and collect/remit taxes in that state.

Nexus is determined differently for income taxes than for sales tax purposes.

Generally, nexus is created for income tax purposes if an entity derives income from sources within the state, owns or leases property in the state, employs personnel in the state in activities that exceed "mere solicitation", or has capital or property in the state. The requirements vary from state to state.

For a state to subject a vendor to sales and use tax collection obligations, the vendor must have nexus with that state. Generally, nexus is determined for sales tax purposes more liberally. A business might have a sales tax nexus in a state if the business has a physical location in the state or if there are resident employees working in the state or if the business has property (including intangible property) in the state or if there are employees who regularly solicit business in the state.

The issues relating to whether a business has a nexus in a state and is thus subject to the state's taxing authority is complicated and each state views the concept of nexus differently. The Sales and Use Tax nexus issue will not go away anytime soon and will continue to pose complexities and costs, particularly for e-commerce companies. States need to do more to reduce the uncertainty which should also improve their Sales and Use tax collections.
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