
Geoff Christian
Managing Director, National State and Local Tax, CBIZ MHM and Regional Director, North America, Kreston Global Indirect Tax Group
Geoff is a Senior Managing Director and the National State and Local Tax Practice Leader at CBIZ MHM.
He has been in his current role for 10 years and before that his experience includes several years within a Big 4 accounting firm and in industry in the retail/hospitality sector.
Geoff has been a participant in the VAT/indirect taxes group for a number of years, having presented to the group on US Sales Tax in Zurich in 2018. Since then, having raised awareness of catches for overseas businesses trading with the US he has developed many client relationships through European Kreston associates.
US sales tax nexus
July 11, 2024
Sales tax implications of providing services to US customers – part 1
US sales tax nexus is a peculiar feature of the American tax system, referring to the conditions that create an obligation to pay state and local sales tax. Unlike the consumption-based value-added taxes (“VAT”) commonly utilised worldwide, their American counterparts have some distinguishing features that often catch non-American businesses off guard. Companies are often unaware that they have a “nexus” or a filing obligation in a particular state. Therefore, it is important for companies selling into the United States to have an understanding of the following:
- What types of activities create sales tax nexus;
- How sales tax applies to certain transactions and services;
- Applicable sales tax exemptions;
- Which states tax all services as opposed to which states only tax certain enumerated services; and
- The most common services that are subject to sales tax in many states.
In Part 1 of CBIZ ‘s eight-part series on sales and use tax, we look at ways in which a taxpayer will create a sales tax nexus with a state, which will require the taxpayer to register and collect and remit sales tax to that jurisdiction. Part Two will focus on a general overview of sales tax and how it applies to certain transactions as well as applicable exemptions from sales tax.
What is sales tax nexus?
Nexus is the connection or “minimum link” between a taxpayer and a state that requires the taxpayer to register, collect, and remit sales tax to the state. Two general types of nexus will require a taxpayer to collect and remit sales tax: physical presence nexus and economic nexus.
What is a physical presence nexus?
Historically, the physical presence standard was the long-standing principle of sales tax nexus in the United States for close to a half-century. The most common form of physical presence in a state is a brick-and-mortar location or retail store. However, a taxpayer may also have a physical presence in a state due to the following:
- Owning/leasing real property in the state (i.e., retail store, warehouse, factory, office, manufacturing facility, etc.)
- Owning/leasing tangible personal property in the state (i.e., machinery, equipment, products, etc.)
- Having inventory in the state (for most states this includes goods owned by Fulfillment by Amazon merchants in the state in a warehouse owned or operated by Amazon)
- Having employees/independent representatives in the state including remote employees
- Attending trade shows in the state
- Performing services in the state
- Delivering merchandise in the state
Once a taxpayer engages in one or more of the activities described above in a state, the taxpayer establishes a physical presence nexus and must register to collect and remit sales tax in that state.
What is an economic nexus?
On June 21, 2018, the United States Supreme Court turned the sales tax world on its head and overturned more than 50 years of legal precedent that required a taxpayer to have a physical presence within a state before that state could assert sales tax nexus. The Court ruled in South Dakota v. Wayfair, 138 S. Ct. 208, that the long-held physical presence standard was an “unsound and incorrect” interpretation of the U.S. Constitution’s Commerce Clause in light of the current economic realities.
The Court, in rendering its decision, upheld a broader “economic nexus” standard based on sales volume and number of transactions in a state. The Court’s decision was based on the premise that an economic nexus standard would level the playing field between traditional brick-and-mortar retail operations and the growing eCommerce industry. It is important to note that the Wayfair decision did not eliminate the physical presence standard in determining whether a sales tax nexus exists. It merely added the broader economic nexus standard.
From a sales tax perspective, economic nexus, simply stated, requires sellers to collect sales tax in states where the seller’s sales exceed the state’s sales or transactional threshold. All states that have a statewide sales tax have adopted economic nexus rules for sales tax purposes. However, there is no uniformity among the states in terms of sales volume threshold, number of transactions, the type of sales that are included in the threshold, etc. Most states have taken the legislative position that a company has economic nexus for sales tax purposes if:
- It has annual sales of goods or services into the state that surpass a dollar threshold, e.g., $100,000; or
- It undertakes a specified number of sales transactions, e.g., 200 or more, into the state.
Some states have eliminated the number of transactions threshold and have enacted only a sales dollar threshold standard such as California and Texas, e.g., the company’s annual sales into California/Texas exceed $500,000.
In determining whether the sales threshold is met, the states utilise the following three types of sales:
- gross sales which includes all sales including sales for resale, taxable, and exempt sales;
- retail sales which do not include sales for resale;
- taxable sales which excludes any nontaxable sales regardless of reason.
The majority of states utilise the “gross sales” threshold stated above which includes transactions that are not typically subject to sales tax, such as sales for resale, in determining whether the economic presence threshold has been met. Accordingly, a company that sells both goods via wholesale as well as sells goods directly to customers online may find its direct consumer sales are subject to a state’s sales tax even where the direct-to-consumer sales themselves do not exceed the established threshold amounts. For example, ABC company makes annual wholesale sales of books in Colorado for $50,001 and also makes annual sales of books directly to customers online in Colorado of $50,000. Since ABC’s company’s gross sales exceed $100,000 in Colorado ($50,001 wholesale sales + $50,000 direct-to-consumer online sales), ABC company will need to register and collect and remit Colorado sales tax on the $50,000 annual sales of books made directly to customers online.
It is important to note that the Wayfair economic nexus standard applies to all companies, including foreign companies with no presence in the United States such as online retailers and service companies. Accordingly, service companies that provide software as a service (SaaS), information services, data processing services, repairs and maintenance services, etc., are also subject to the Wayfair economic nexus rules and should review their sales in each state to determine whether economic nexus has been met and sales tax collection is required.
Conclusion
In recent years, states have become much more aggressive in pursuing sales tax audits even with foreign businesses. Therefore, it is important for all companies selling to the United States to be proactive in identifying where they have sales tax nexus and begin filing in those states, which could help reduce the imposition of tax, penalties and interest if they are selected for audit. Taxpayers who determine they have had sales tax nexus and corresponding exposure for several years should be proactive and take advantage of the states’ Voluntary Disclosure Programmes and/or Tax Amnesty programmes in order to reduce penalties and in some cases, interest as well.
If you need assistance evaluating whether your company has sales tax nexus or have any questions, please get in touch.