Nexus is a business term meaning the closest level of connection between a business and state. A nexus is a form of perpetual residency that can be used for tax purposes. Most states have a nexus requirement before the state can tax out-of-state corporations. Nexus imposes a set of strict qualifications for establishing the taxpayer’s domicile and control in the state. Until this association is established, the taxing jurisdiction can’t impose the sales taxes.
Nexus is a term that has been used for years. The term means is that you and your business are connected to a state’s tax system and that state’s tax system has a connection with a whole bunch of other states. Nexus is an important concept in tax law in the United States as it determines how much tax a business entity owes in each state in which it operates.
Let us discuss Nexus in detail.
One of the most important factors you have to consider when considering the nexus of a state in a case is whether or not the state has a physical presence. Big retailers often have physical presences in states they sell to since they have warehouses and distribution centers in each state. But sometimes a smaller retailer, or a single transaction, can be enough to establish nexus in a state.
In South Dakota v. Wayfair, the Court of the United States held that in order for a state to establish nexus under the Commerce Clause of the United States Constitution, a court must find that the defendant was not just physically present within a specific state, but that they were also engaged in activities there that had a substantial effect on interstate commerce. Physical presence in a state is the equivalent of the bricks-and-mortar nexus traditionally established by the traditional standards for establishing a state of incorporation under state jurisprudence.
In the lead-up to the decision of the Court, many states passed new types of economic nexus legislation to manage how sellers conduct business. There is no distinctive definition of nexus across the fifty states. Moreover, the rules and definitions for specifying nexus change frequently. Most of the states are mindful to hand themselves room to trick and wile in their definitions.
Final Words
In a nutshell, nexus is the connection between a seller and a buyer (or a seller and a consumer) that allows one party to assert tax liability on the other. The effect of nexus is that a state may impose a tax even if the seller is not legally obligated to pay it, and even if its buyer is not subject to the tax. The Supreme Court has held that a state must have a particular connection to a transaction before it can assert nexus but has also granted states some latitude in its definition of nexus.
Attend the Compliance Prime webinar to learn more about Nexus.
