What is a Tax Nexus?

Tax Nexus in Income Taxes and Sales Taxes

Tax Nexus for Income and Sales Taxes
Tax Nexus Defined for Income and Sales Taxes. Talaj/Getty Images

What is a Tax Nexus? 

A nexus in general means a connection. 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 ay and collect/remit taxes in that state.

What Determines Nexus? 

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

For Income Tax Purposes
In general, 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 Sales Tax Purposes
Nexus is determined for sales tax purposes more loosely. Here are Here are some cases in which a business might have a sales tax nexus in a state:

  • If the business has a physical location in the state
  • If there are resident employees working in the state
  • If the business has property (including intangible property) in the state
  • 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 complex and each state views the concept of nexus differently.

A nexus for state sales tax purposes has in the past required a physical presence of the taxing business in that state; most recently nexus has also been invoked in relation to affiliates.

Sales Tax Nexus and Online Businesses

In the past 10 to 15 years, there has been a growing concern by states over online businesses and non-payment of sales taxes.

The states feel that online businesses are not collecting sales taxes from online sales, and the states feel these revenues should go to them. The issue is the difficulty of monitoring collections and enforcing them.

Affiliate Nexus vs. Click-Through Nexus

For online sales, there are two different types of nexus - click-through nexus and affiliate nexus. Click-through nexus is a direct connection between the buyer and the seller, while affiliate nexus includes the presence of an affiliate between the buyer and seller. 

Many states have enacted laws requiring sales tax to be collected for online sales or they have required affiliates with a tax nexus in their state to collect and pay sales taxes. While an affiliate is not an employee or even an independent contractor, an affiliate is associated with a business, and states have been using this connection to capture sales taxes. 

Of course, Amazon is the biggest elephant in the room in this continuing saga of online sales taxes. Amazon is adding more distribution centers, which are clearly tax nexus points, in most states, so even Amazon is collecting sales taxes for its online sales. 

Nexus and Online Sales Taxes

Read more about the ongoing controversy relating to Online Sales Taxes, including the progress of the Marketplace Fairness Act that is currently stalled in Congress.

The Sales Tax Institute also has more detailed information about click-through nexus and affiliate nexus issues and legislation.