The Wayfair decision in 2018 brought significant attention to economic nexus, fundamentally reshaping how states enforce sales tax obligations for out-of-state sellers. Businesses, particularly those in the online space, are now keenly aware of how much they sell in different states and whether they meet economic nexus thresholds. However, while economic nexus grabs the spotlight, physical presence nexus remains a cornerstone of sales tax law and continues to play a critical role in determining tax obligations.
Physical Presence Nexus: Broader Than You Think
Physical presence nexus has always been a determining factor in whether a company must collect and remit sales tax in a state. Nexus refers to the necessary connection between a business and a tax jurisdiction, which triggers a company’s obligation to collect sales tax. Despite the surge in economic nexus standards post-Wayfair, the physical presence test still stands as a foundational rule that applies even when economic thresholds aren’t met.
The term “physical presence” encompasses much more than owning or leasing an office, warehouse, or retail space in a state. It also includes having employees, affiliates, service personnel, or independent contractors working on your behalf within the state. For example, if a company hires independent contractors to install flooring in Illinois, their presence within the state creates a physical nexus for that business, thus triggering the obligation to collect sales tax. Additionally, having a representative attend trade shows or host in-person meetings can establish physical presence.
Contractors and Influencers: A Hidden Nexus Trap
Contractors, including influencers operating on behalf of businesses, can also create physical nexus if their activities within a state are sufficient to establish a market for the company. This can include sales solicitation, product installation, or ongoing servicing of goods. States may assert nexus if these contractors engage in activities that are essential to maintaining or establishing the business’s market presence within the state. Although contractors are not employees, their involvement in key business functions in a state can be enough to trigger nexus. This applies not just for sales tax, but potentially for income tax purposes as well.
Remote Work and Inventory: Emerging Concerns
The rise of remote work has introduced new complexities for nexus determinations. For example, a company with remote employees working in a state may unknowingly create a nexus for both sales and income tax purposes, depending on the state’s rules. The presence of employees, even in a non-office setting, may be sufficient to trigger a state’s tax obligations.
Storing inventory has long been a classic trigger for physical presence nexus. Many businesses today use marketplace facilitators, such as Amazon, which often store their inventory in warehouses across multiple states. This can lead to unexpected sales tax liabilities, even for companies that might otherwise not have had any physical presence in a state. A recent Pennsylvania court case suggests that sellers who have little control over where their inventory is stored might not have nexus; however, this is an evolving area and could vary by jurisdiction.
Navigating the Complexities of Physical and Economic Nexus
While economic nexus has transformed the landscape, physical presence nexus remains a critical, and often overlooked, factor in sales tax obligations. For businesses, it’s essential to assess both economic and physical presence nexus to avoid costly audits and penalties. If your company has employees, contractors, or inventory in multiple states, you may have an obligation to collect and remit sales taxes in those states, regardless of whether you meet the economic nexus thresholds. It is crucial to stay ahead of changing nexus rules and regulations to avoid costly audits and penalties.
If you’re unsure whether your business is at risk of an audit or need help understanding your nexus obligations, schedule a meeting with Leyton’s State and Local Tax Team. We can assist with registration, compliance, and audits, ensuring that your business navigates these complexities smoothly.
