What is Physical Presence Nexus

Physical Presence Nexus

The physical presence of a business used to be easy to determine. As a result, tax obligations were more straightforward. But amid legislation changes and the digital revolution, a business’s physical presence is no longer as simple as a concrete geographical location.

At first glance, a physical nexus is a business with a physical presence in a state. This can be a brick-and-mortar store, an office, or a warehouse in a particular jurisdiction. However, the criteria of a physical nexus for taxes is a lot broader than that.

Suppose your company is physically based in Delaware where no sales taxes are required. But you have remote employees and independent contractors based in New York, where sales taxes exist. Your business is now subject to New York’s physical nexus requirements.

Another way to illustrate this is if a company, such as an Amazon seller, stores inventory or maintains a warehouse in a particular state but whose physical nexus is complicated in selling and distributing online. The act of selling online, even if the seller doesn’t have a physical store in the state in which their product is sold, nevertheless triggers physical presence nexus. Fulfillment by Amazon sellers who have inventory stored in Amazon warehouses is also subject to this regulation. Even if the seller is the owner of the inventory, it is considered to be physically located in the state, hence the reason why the seller must comply with the state laws

In summary, the physical nexus extends to:

Having a mailing address
Employing remote workers and independent contractors (who could be living outside the state where your office is located)
Maintaining a warehouse and storing inventory – including goods sold online
Conducting temporary or affiliate business, such as an out-of-town trade show or pop-up shop
Having multiple in-person sales meetings or presentations

It’s no secret that states are pursuing business sales and uses taxes. This means physical nexus sales tax obligations can easily slip under the radar if you’re not careful.

Therefore, businesses that sell and distribute online need to be aware of the various ways in which physical presence can be established, and they should seek professional advice to ensure compliance with state tax laws.

Physical vs Economic Nexus: What’s the Difference?

Before the South Dakota v. Wayfair case, physical presence was the standard for sales tax compliance. So if you didn’t have offices or employees in a state, you didn’t need to collect or remit sales tax.

But in 2018, the South Dakota v. Wayfair ruling changed everything and allowed states to bring economic business activity into the sales tax compliance mix. Now, if businesses crossed an annual minimum threshold of $100K in transactions in a state, they could be required to collect and remit sales tax in that state. This is called an economic nexus.

The catch, though, is that sales tax nexus rules differ in each state, as long as they stick to the minimum thresholds stipulated in the South Dakota v. Wayfair ruling.

In summary, the physical nexus extends to:

Physical presence nexus legislation refers to the idea that a business must pay sales tax in a state if it has a physical connection or presence in that state. The specific criteria for determining physical nexus may differ from state to state. Businesses which meet the criteria are required to register, collect, and remit sales tax to the appropriate tax jurisdiction.

Notably, the primary factor determining whether a business is obligated to collect and pay states’ taxes is physical nexus.

How has the digital landscape complicated physical presence?

It’s no longer optional for businesses to have an online presence, especially those wanting to scale and expand their market. Market drivers of online business include the rapid penetration of mobile devices (75% by 2030), the threefold spending by middle-class consumers by 2030, and the speed at which companies can expand across locations and jurisdictions with markedly less investment.

This landscape has implications for sales tax nexus triggers. The nature of physical presence sits within far more complex ecosystems. This is how physical presence plays out in the digital era:

Click-through Nexus

A physical nexus can be triggered by something as simple as affiliate links providing an out-of-state seller with referrals or leads from an in-state business’s website.

Affiliate Nexus

An affiliate nexus is created when businesses have agreements with affiliates in another sales tax jurisdiction or promote out-of-state brands’ goods for commission.

Cookie Nexus

The virtual connections created by website cookies can also trigger a pseudo-physical nexus in some states.

Marketplace Nexus

When providing a marketplace platform for third-party sellers from other states, businesses can open them up to the sales tax laws from their sellers’ states.

Third-party Nexus

A third-party nexus arises when a business uses third-party services. From fulfillment centers to drop-shippers, if they’re located out-of-state, you could be creating a physical nexus.

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