Nexus: A Four-Point Refresher
Tax-savvy multichannel marketers know “nexus” isn’t a new hair product or a high-priced automobile. The term “nexus” (derived from a Latin word meaning “to connect”) refers to the amount of contact an out-of-state retailer must have with a state before that seller is legally obligated to collect sales tax from customers.
The Supreme Court’s landmark Quill v. North Dakota decision in 1992 made clear that, under the Commerce Clause of the Constitution, the nexus standard requires an in-state physical presence on the part of the retailer. In other words, mail order sales alone will not subject a remote seller to sales or use-tax collection obligations.
Nearly 16 years later, plenty of catalogers still struggle to find ways to avoid being subject to tax collection on sales to customers in various states. Here are four things to keep in mind in your efforts to avoid nexus.
1. Beware the Nexus Witch Hunt
Don’t overestimate the scope of the Quill decision. Many mistakenly believe the only way a catalog company can establish nexus is if it operates a facility in the state, such as a retail store, or if its employees enter the state to solicit sales or provide customer services. In reality, the comfort zone for direct marketers is quite tight, and there are numerous ways in which you inadvertently can fall into a nexus trap.
State revenue departments regularly conduct audits of unregistered retailers. Auditors closely scrutinize sellers’ business operations and marketing relationships to discover some basis — however remote — for asserting a nexus claim. In connection with these nexus witch hunts, state tax administrators often rely upon novel theories of tax liability, including so-called “agency nexus” and “affiliate nexus.”
2. Agency Nexus
The Supreme Court ruled back in 1960 that if an out-of-state retailer uses an in-state agent to perform services on its behalf, the agent’s physical presence will cause the remote seller to have nexus in the state. This is referred to as “attributional nexus.”
