IF I DON’T HAVE INCOME TAX NEXUS, I DON’T HAVE SALES TAX NEXUS, RIGHT? WRONG!
Your office is in New York City. You have employees in California, Illinois, and New Jersey, and your warehouse is in Pennsylvania. You have been filing income tax returns in New York State/NYC, California, New Jersey, and Pennsylvania for years, but you haven’t filed income tax in Illinois because you are protected by PL 86-272. There has been income tax filing requirements because you have a sufficient “physical presence.” This is income tax nexus. Simply put, states determine whether companies have a tax filing responsibility (and potentially tax obligations) based on whether the company has nexus in their state.
Suppose you get a notice from Minnesota, demanding a sales tax return. “But, why?” you ask. “I have no nexus there!” Yes, you are excused from income tax nexus, but you could be subject to sales tax nexus.
Since “protected activities” (PL 86-272) applies only where the in-state activities are the solicitation of orders for sales of tangible personal property, it has no applicability where the solicitation is for the sale of intangible property, real estate, or services.
Physical presence is the most traditional nexus standard, especially, for sales and use tax. A number of states, however, are reaching beyond the traditional view of nexus toward an “economic nexus” standard in which physical presence is not required as long as there is an “economic” connection to the state.
If your customers found your product by clicking-through an advertisement that came through a website with a third party that is based in, let’s say, Minnesota, sales tax can be required. Minnesota wants its cut! Under the click-through nexus rules, a retailer is “presumed to have a solicitor in that state if the retailer enters into an agreement with a resident, if that resident, either for commission or other consideration, directly or indirectly refers customers,” whether by link on a website or otherwise.
This is popularly referred to as the “Amazon Law.”
Under New York tax law – New York being the originator of click-through nexus - an out-of-state e-commerce seller is presumed to have nexus in New York, if the seller:
Following New York’s enactment of its click-through nexus law, other states have followed with similar rulings. Twenty-five states, and Washington, D.C., now have laws or a pronouncement of some kind, implementing click-through nexus.
It’s important to keep updated with the latest state tax laws – make sure to reach out to a trusted advisor.
Written by: Stacey Genna, Supervisor