European businesses selling remotely or that have a physical presence within a US state must contend with one of the more complex tax regimes in the world. Each state sets its own sales tax rules and rates, and can often take widely varying approaches to what is subject to sales and use tax and what is exempt. As a result, there are many different tax frameworks and regulatory variations, covering everything from tax liability to reporting across the 45 states (plus the District of Columbia) currently imposing sales and use tax.
Added to this, local area tax jurisdictions within states also have separate powers over some aspects of taxation and can set different, or additional, rules for their area. Where sales tax is not a flat rate across a state, returns must show how sales tax is apportioned within the relevant tax jurisdiction, and this can include state, city, county, and metropolitan area taxes.
If you are a European entity doing business in the US, what does this complex landscape mean for day-to-day sales tax management?
What is the nexus principle?
The requirement to collect and remit US sales tax is rooted in the principle of ‘nexus’, which is a ‘connection’ to a specific state and therefore its indirect tax rules. Historically, this connection was based on a business having ‘physical nexus’. Defined as a substantial physical presence in a state, this traditionally triggered a reporting obligation for US sales and use tax.
Today, nexus expands beyond just physical presence. The landmark ruling in South Dakota v Wayfair US Supreme Court judgment in 2018 expanded nexus to what we now refer to as economic nexus. Economic nexus is triggered by sales revenue, sales volume, or the number of sales transactions, which are defined by individual states.
Whether you are expanding your business into the US right now, or are already trading there, establishing your nexus ‘presence’ in each state is the first step to determining your US sales and use tax liability and is essential when it comes to planning your sales tax strategy.
It is important to look at whether your activities create physical nexus or economic nexus, or both, as either one is sufficient to render your business liable for sales and use tax.
Indications of physical nexus?
It would be easy to think physical nexus only applies if you have offices, warehouses, or a sales office within a state boundary, but the reality is different. Physical nexus can also apply to sellers of both physical and digital goods, and services provided from outside a state. Aside from having physical assets in a state – such as the presence of offices, or even employees within a state – the following activities can trigger physical nexus:
Employees travelling in and out of a state – even a single business visit to a state can create physical nexus and trigger sales and use tax obligations;
Working with third-party contractors in a state – in the same way that having employees based in a state can create nexus, working with third parties can also create nexus in that state;
‘Cookie nexus’ – for remote sellers, physical nexus can be created when a seller’s website installs cookies on a customer’s device;
Trade shows – exhibiting at trade shows can create nexus; for example, California has a 15-day threshold and Massachusetts has a three-day threshold; and
Online affiliate marketing (‘click-through nexus’ or ‘Amazon tax’) – when a remote seller business gives a referral fee or commission to an in-state business that sends customers to it via a direct link, click-through nexus is created.
To complicate matters further, states will typically look at various activities in unison to decide whether you have nexus. A day at a trade show or a few days visiting clients could be all it takes to tip the balance and make you liable for sales and use tax in that state for an entire year.
Does my business have economic nexus?
Economic nexus is most likely to apply to remote businesses based outside the US. There are two aspects of business activities used to assess whether economic nexus is triggered within a state: sales revenue value and number of sales transactions.
Unfortunately, there is little consistency between states as to the level of revenue or the number of transactions at which nexus is created. Nor is there a standard time period for which this is calculated. Economic nexus can be determined by varying factors, such as:
Gross sales revenue – all sales, including tax-exempt sales and exclusions;
Taxable sales revenue – only taxable sales, with tax-exempt or excluded tax sales not counted; and
Number of transactions, which includes subscription renewals (counts as one transaction).
However, it is important to note that complexities occur from state to state. Some states use one measure to establish economic nexus, while others use a combination. There is also a clear trend of taxing jurisdictions eliminating the threshold on number of transactions. About 20-plus states have done this so far.
Remaining compliant with an end-to-end tax automation solution
When planning your US sales and use tax strategy, understanding your nexus – the root of tax liability – is vital.
Even if you do not yet meet the threshold in a state for economic nexus, monitoring sales on a state-by-state and ongoing basis is essential, keeping track of individual state legislative updates as the situation changes.
European businesses can overcome these challenges using end-to-end tax automation solutions that streamline tax calculation and reporting. These tools mitigate the risks of complexity around US sales and use tax compliance, ensuring you are always up to date on the latest regulations and legislative changes.
