Nexus for Sales and Use Taxes


States have become more aggressive in claiming a seller has substantial nexus for sales and use tax purposes. They look for in-state activities, relationships and assets of unregistered businesses with customers in the state. Here are some tips to help businesses determine their sales and use tax collection obligations:

checkbox Review “physical presence” law. The 1992 U.S. Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298, held that a seller must have a physical presence in a state before the state can require sales tax collection. The types of physical presence that create nexus, however, vary from state to state. State statutes, regulations, tax agency rulings and court decisions should be reviewed regularly for developments. The AICPA offers a directory of Web links at yellow/yptstax.htm.

checkbox Know where property is located. Verify the location of inventory, goods out on consignment, leased property, real property, equipment, computer servers and delivery trucks. Just about any property—perhaps even intangible property such as software—that a state may treat as tangible can create nexus.

checkbox Know the whereabouts and activities of employees and representatives. Employees, independent contractors, agents or representatives in a state may create nexus, depending on the nature of the relationship and activities. Again, states vary as to definitions, exceptions, time limits and the types of activities the person or entity may engage in that create nexus. Generally, the activities must relate to sales. Some nexus rulings refer to Tyler Pipe Industries Inc. v. Washington Department of Revenue, 483 U.S. 232 (1987): “… the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.”

checkbox Examine the nature of transactions and relationships in the state. Some states have broadened the types of relationships that can create nexus. For example, a few states, such as Arkansas, Idaho and Minnesota, provide that if a seller and in-state business have a specified relationship and the in-state business in some way promotes sales for the seller or has similar products or company name, the seller must collect sales tax

In April 2008, New York modified its sales tax law to create a presumption that a seller is soliciting business through resident representatives if it compensates them for directly or indirectly referring customers. Thus, sellers who allow “associates” who reside in the state to place a link on their own Web page and earn commissions for sales generated when customers use the link may be subject to sales tax collection obligations in New York. (Online retailers and have filed suit challenging the law’s constitutionality—see “Tax Matters: Online Retailers Battle N.Y. Nexus,” page 96.) Most states, however, treat advertising alone as not creating nexus.

checkbox Take into account multistate operations and mobile customers. A recent ruling involved a tire dealer with locations in four states including Massachusetts and New Hampshire, which has no sales tax. The Massachusetts Appellate Tax Board held that the seller’s New Hampshire stores should have collected use tax when they installed tires on Massachusetts cars, since employees could readily tell from the license tag where the tires would be used. (Town Fair Tire Centers v. Commissioner of Revenue, docket no. C280607 (6/08))

checkbox Always ask questions. Avoid past-due tax liabilities, penalties and interest by regularly inquiring into the business and Internet activities of clients and employers. An individual’s sale of a few used items on an auction Web site might grow into what a state might consider a business with sales tax collection obligations. New services, such as on-site training, might be offered, or new employees may work out of state and create new tax collection obligations.

—By Annette Nellen, Esq., CPA, a tax professor and director of the MST Program at San José State University and an Irvine Fellow at the New America Foundation. She is a member of the Individual Income Tax Technical Resource Panel of the AICPA Tax Division. Her e-mail address is

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