The 2018 US Supreme Court judgment in the South Dakota versus Wayfair International changed the commercial and taxation landscape of the country forever. It gave rise to a taxation arsenal, which states could use against businesses, big or small to improve their revenue generation.
Prior to the 2018 ruling, the Supreme Court in its 1992 judgment had held that if businesses do not have a physical presence in a state (factory, warehouse, office, etc.) they are not required to-
- Either collect sales tax from their consumers in different states
- Alternatively, pay sales tax proceeds to the state government and its taxation authorities.
Both these criteria were overturned in the famous ruling. What followed was a new criterion- $100,000 USD of sales or 200 Individual Sales transactions. If any business is doing the same, they have to collect sales taxes and pay them forward.
In this article, we are going to look at six major forms of business activity, which can open businesses to state tax nexus laws.
6 Business Activities which can attract State Nexus Taxes: The List
Any form of economic activity or commercial activity done by a business or a company within the territorial boundaries of a state is subject to state taxes. Every state has its own level of judging these nexus taxes. It is not consistent throughout the Union and varies from state to state.
Even though this point is obvious, it needs to be mentioned as it is part of a business activity. If your business has an office, factory, warehouse, stores, showrooms, etc. or any other physical markers, you have to pay nexus taxes according to the individual laws drafted by the respective states.
Remote Work and Employees-
Even if you are part of Trade Shows, or your representatives are traveling to the state, it is taken to be a sign of the presence and invites state nexus tax. If you are working with third-party contractors, or are even video-conferencing business activities, states have the right to collect the taxes.
Affiliate Sales and Marketing-
Some businesses are using the Affiliate Model to garner handsome revenues from big corporations that allow models like these. If a particular jurisdiction has an affiliate model set up which is contributing to sales and marketing, the state is fully within its jurisdiction to impose nexus tax.
Referral Click-Through Programs-
Every time a consumer refers to a business through a code, he or she gains certain benefits. States have taken note of such commercial activities as well, leading to them also being brought under the nexus laws. In technical terms, this has been referred to as the ‘Click-Through-Nexus’ by government and taxation authorities.
Marketing or advertising models like Dropshipping, Hoardings, Banners, etc. can prompt local populations to make purchases from the brand. This can be both directly as well as indirectly. States have realized that newer business models like Dropshipping are very valuable. Hence, nexus laws have been imposed on them as well.
It is obvious that the ambiguity of a Federal Law that empowers states to interpret a ruling arbitrarily has made life difficult for businesses to operate. Failure to comply with them can invite more severe sanctions and penalties for private corporations. It is necessary for businesses to keep a track of all their taxes at every step of their commercial journey.