In the world of tax, “nexus” is something of a magic word. It’s the catalyst, the decider that lies between taxation and tax-exempt. Put most simply, nexus is a collective term that refers to all the links, the connections, the contacts, etc. between a taxpayer and political jurisdiction (e.g. a state). This is of paramount importance for sales and use tax because if a taxpayer has sufficient nexus within a state, they will be judged to be “doing business” in that state and thus will be subject to that state’s taxes.
The current debate about online sales tax, including Senator Durbin’s Mainstreet Fairness Act and the so-called “Amazon tax” laws passed in Illinois, New York and other states, really comes down to a question of nexus. The precedent was established in 1992 when the Supreme Court ruled that the gold standard, as it were, for nexus was physical presence. The affiliate tax bills have modified the definition of nexus and of “doing business in the state” to include having affiliates in the state. In other words, the bills have made it so that state resident affiliates are treated as a physical presence for taxation purposes for the companies they are affiliates for.
The 1992 Supreme Court decision leaves open the possibility for Congress to pass new laws, changing the landscape for sales tax on out of state companies.
Physical, brick and mortar presence, is a pretty clear cut case (though not always), but otherwise legal issues of nexus can be quite nebulous. Especially today with many states facing budget shortfalls in the wake of the 2008 financial crash, departments of revenue are becoming increasingly aggressive in seeking sales and use tax revenue.
For more information on nexus, how it relates to sales and use tax, or for other tax related legal concerns, contact the Illinois tax attorneys at Horowitz & Weinstein.