What Is Sales Tax Nexus? And What Does It Mean for eCommerce Retailers?
Many eCommerce retailers have probably never heard of the 1992 Supreme Court case we discussed recently— Quill Corp. v. North Dakota. Up until recently, the only thing you really had to know was that the decision in that case has saved you from sales tax headaches.
Unfortunately, the 25-year grace period seems to be ending and it’s time for eCommerce companies to prepare. The overview of the online sales tax problem and the challenges you might face because of it, is helpful; however, now it’s time to dig a little deeper into the legal topic.
Nexus is the legal term at the heart of the online sales tax debate. But what is nexus and what does it mean for your eCommerce business?
Defining Sales Tax Nexus for eCommerce Retailers
The strict legal definition of “nexus” is a connection between people, things, or events with a focus on chain of causation. However, the definition becomes a little more ambiguous when it comes to retail.
The ruling in Quill Corp. v. North Dakota is predicated on the concept of nexus. In that case, the Supreme Court ruled that states could not collect sales taxes from sellers that did not have a physical presence in that state. This physical presence requirement has kept eCommerce retailers from dealing with many potential sales tax challenges.
Tech innovation and the emergence of mainstream eCommerce have helped complicate the meaning of nexus. And now that online sales taxes seem like an inevitability, it’s important to know what sales tax nexus means for your eCommerce retail business.
The Complicated Nature of Nexus in eCommerce Today
While physical presence seemed fairly straight forward in 1992, it has become increasingly complicated over the years. Now, most states that haven’t pushed back on eCommerce retailers for online sales taxes interpret nexus as having a physical store, office, or distribution center in the customer’s state.
However, even that definition is under fire as states push for more power to collect online sales taxes. Depending on the state you’re dealing with, any of the following could fulfill the sales tax nexus requirement for online retail:
- Sales made while traveling to trade shows in different states
- Having employees working in a different state
- Attending meetings outside of your home state
- Using third party marketing strategies such as remote ad targeting of affiliate marketing
- Leveraging Fulfillment by Amazon in a state where Amazon has a distribution facility or warehouse
- And more
Rebecca Madigan, executive director of the Performance Marketing Association, has said the only viable solution to such a confusing mess of nexus requirements is to require all eCommerce retailers to collect online sales taxes for all states. While this certainly seems like where we’re headed, it’s clear that eCommerce retailers must prepare to properly apply any number of nexus-based regulations on a transaction-to-transaction basis.
According to Scott Peterson, director of government affairs for Avalara, “Today, any number of standard business activities can result in a tax obligation. Ever state’s regulations are different, so it’s important to have a nexus assessment performed periodically if your business makes sales to out-of-state buyers.”
Nexus assessments will prove essential for online sales tax compliance, but there are residual issues that you’ll also have to manage. As you apply all of the different online sales tax laws to your eCommerce site, you’re bound to unknowingly create customer experience friction. Whether it’s through form field errors or inconsistencies in disclosing online sales taxes to shoppers, you have to be ready to optimize customer experience in the way of new regulations (even if they vary between tax jurisdictions).
Don’t let complicated compliance processes ruin your site’s customer experience. Learn how to identify customer experience friction and optimize your site to ensure customers are moving smoothly through checkout.
John Thompson, CEO, UserReplay