Understanding Nexus
Nexus: Footprint, substantial and continuous contacts, and physical presence no longer constitute the definition of this term.
Nexus is no longer clear as having a physical building in a particular state or having full-time employees physically present. The word “physical” is no longer required when determining nexus. There is now an economic nexus, click-through, and order drop connection which triggers sales tax liabilities.
Given the variations in rates and rules that apply to product taxability, it’s important to know which jurisdictions require sales tax collection. Yet knowing where your company has nexus (the connection that triggers a sales tax collection obligation) is more difficult than it seems.
Expanding the Definition of Nexus
Nexus can be triggered even for sellers without a significant physical presence in a state, such as online sellers. Other nexus-creating activities include:
- Traveling salespeople
- Attendance at trade shows
- Use of a drop shipper
Deciphering nexus is only the first step in the complicated process of identifying the product taxability challenges ahead.
Sales Tax Implications for Service-Based Businesses
Many service-based businesses that provide customer support, installation, or warranty services in conjunction with the sale of a physical good could keep an army of accountants busy for a year trying to determine exactly what is taxable.
If you run service contracts on goods sold, or if you service tangible goods as part of your sales to customers, you may be liable to collect sales tax.
Examples of Service Taxation
- Hawaii, New Mexico, and South Dakota: A sales tax is imposed on all services provided.
- Other States: Lawmakers have taken a piecemeal approach, taxing some types of services while leaving others exempt.
Identifying Taxable Services
Determine whether the state in which you have nexus defines certain services as taxable.
Example: Texas
In Texas, janitorial services are taxable. Generally, tax is due on the entire amount charged for a taxable service, including:
- Labor
- Materials
- Mileage charges
This applies even if these items are separately stated.
Frequently Asked Questions
What is nexus in the context of sales tax?
Nexus refers to the connection between a business and a state that obligates the business to collect and remit sales tax. This connection no longer requires a physical presence and can now be triggered by economic activity, such as online sales or third-party fulfillment.
Can my business have nexus without a physical location?
Yes. A business can establish nexus through non-physical activities like having traveling salespeople, attending trade shows, or using drop shippers, even without owning property or employing staff in the state.
How do economic and click-through nexus rules work?
Economic nexus is based on revenue or transaction thresholds within a state. Click-through nexus arises when sales are driven by referrals from in-state affiliates, potentially triggering tax obligations even without direct presence.
Are services always subject to sales tax?
No. Taxability of services varies by state. Some states, like Hawaii, New Mexico, and South Dakota, tax all services, while others only tax certain services. It’s crucial to check each jurisdiction’s rules.
How do I determine if my services are taxable in a specific state?
You need to examine each state’s tax laws. For example, in Texas, janitorial services are taxable including associated labor, materials, and mileage even if these costs are separately itemized on the invoice.