The Importance of Nexus in State to State Business

When conducting business across state lines, it is crucial to have a thorough understanding of nexus laws.

While the word “Nexus” has a variety of meanings, when it comes to taxation, “nexus” refers to whether or not a person or transaction can be subject to tax in a particular jurisdiction. Sales and use tax nexus is one of the most common considerations for businesses, and the current law requires “substantial” nexus to be had in a state before said state can move to collect any tax. However, the definition of “substantial” when it comes to establishing nexus is not exactly cut and dry and varies state by state; jurisdiction by jurisdiction. Nexus used to be established by physical presence; however, the prevalence of online sales have made it necessary for states to consider an alternative to the physical presence test. The new nexus test is fashioned more on an economic nexus standard. However, the newly defined economic nexus standard has been questioned by various courts. The states are hoping the courts will reverse their position on these new economic nexus standards, thereby allowing their use. In allowing the use of the new economic nexus standard, the courts would need to recognize that many of the sales and use tax laws were created and interpreted before the development of readily available sales tax software and before the eCommerce marketplace exploded. As you can see, nexus can be tricky to navigate!

Retailers and service providers are especially affected by nexus rules, but buyers of property and taxable services should have a good understanding as well. A recent Tax Executive article provides a thorough look into the current state of nexus law, as well as explains what businesses need to consider and do to remain in compliance.

 

WA provides tax guidance on the new nexus standards

An out-of-state wholesaler will have economic nexus if it has (i) more than $267,000 in gross income in Washington; (ii) more than $53,000 of payroll in Washington; (iii) more than $53,000 of property in Washington; or (iv) at least 25% of total property, payroll, or income in Washington.

Washington ~ Business and Occupation, Sales and Use Taxes: Changes to Nexus Standards Explained

The Washington Department of Revenue has provided excise tax guidance on the new nexus standards applicable to out-of-state taxpayers making wholesale sales and retail sales in Washington. Effective September 1, 2015, out-of-state businesses making wholesale sales into Washington will be liable for wholesaling business and occupation (B&O) tax on sales delivered into the state for the current year if they meet any of the economic nexus thresholds during the prior calendar year. An out-of-state wholesaler will have economic nexus if it has (i) more than $267,000 in gross income in Washington; (ii) more than $53,000 of payroll in Washington; (iii) more than $53,000 of property in Washington; or (iv) at least 25% of total property, payroll, or income in Washington. In order to determine whether a wholesaler exceeds the $267,000 threshold, both apportionable income attributable to the state and wholesale sales delivered to Washington are included.

Effective September 1, 2015, a click-through nexus standard has been adopted for retailing B&O tax and sales tax purposes. An out-of-state retailer will be presumed to have nexus with Washington if it (i) enters into agreements with Washington residents and pays a commission or other consideration for referrals via a website link or otherwise; and (ii) has more than $10,000 in sales into Washington during the prior calendar year due to these agreements. The presumption may be rebutted by showing that each in-state resident with whom the retailer had an agreement was prohibited from engaging in solicitation activities on behalf of the retailer and did not engage in such solicitation.

Tax Topics: New Nexus Standards for Wholesale and Retail Sales — Effective September 1, 2015, Washington Department of Revenue, August 18, 2015, ¶203-928