Nexus and Sourcing

Before collecting tax for any State, you should be aware of its sales and use tax regulations.  These regulations are quite complex and differ from state to state.  While Taxcompliant does not offer specific advice or interpretation of those regulations for any particular retailer, the information presented here should serve as a general guide when evaluating why you should collect either sales or use tax and how rates are determined.

Here are some general issues that should be considered for each state:

• Taxcompliant rates are for tangible personal property.  This classification generally applies to most products, however states may treat some items differently where there may be separate rates, or the products may not be taxable.  Examples might be food, construction equipment, etc.
• Does your firm have “nexus” in the state?  Firms generally have “nexus” in a state if they are physically located in the state, or have some other condition that establishes a business presence.  Firms with “nexus” must collect and remit sales tax (not use tax).
• If your firm has “nexus” in the state, should it collect tax based on the location of the firm, or the location of the customer (where the item is shipped)?  A state is considered to be origin-based if it requires tax collection sourced at the firm’s location; the state is considered destination-based if it requires tax collection sourced at the customer’s location.
• If your firm does not have “nexus” in the state, you may be required to  collect use tax.  Prior to the recent 2018 Supreme Court decision, South Dakota v. Wayfair, retailers without “nexus” were not required to collect use tax in any particular state, although many did as a courtesy to their customers (otherwise the customers would be required to report and pay this tax to their respective states).  Now only those non nexus retailers whose sales volume is less than limits established by the states may be exempt from collecting use tax.  (The limits set by Illinois, for example, are sales of tangible personal property equal to or exceeding $100,000, or 200 separate transactions per year.) However, some states have established “notice” rules that require the retailer to remind their customers that they must pay use tax, and at the end of the year submit a report to the state identifying those sales where tax was not paid. (In lieu of complying with notice requirements, it may be easier to simply collect and report taxes to states that have imposed notice rules.)
• Some states have defined “economic” nexus as applying to out-of-state retailers whose sales exceed the exemption levels indicated above. Texas, for example, established this level at $500,000 per year. For Texas, the out-of-state retailer is allowed to collect and report a flat 8% use tax rather than use destination rates that would otherwise apply. For most other states, out-of-state retailers should collect taxes according to the “Destination” rule (even for those states with established “Origin” rules for nexus retailers).

State Rules For Sourcing And Shipping. Sourcing refers to the location where sales or use tax should be collected. If the State is “Origin”, tax should be collected at the retailer location where goods are shipped. If “Destination”, tax should be collected at the customer location where goods are received. Shipping charges may or may not be taxable depending on the particular state where goods are received.

      State                  Source      Shipping Taxable?     State             Source       Shipping Taxable?   

*Retailers with physical nexus in “Origin” states must use the single tax rate for the retailer’s location. Out-of-state retailers must use the “Destination” rule. A helpful guide for illustrating this is the decision chart published by the Illinois Department of Revenue: https://www2.illinois.gov/rev/research/taxinformation/sales/Documents/LevelingthePlayingFieldRetailerFlowchart.pdf.

It is important to note that the chart listed above is for a snap-shot in time and may be out-of-date. After Wayfare, states adopted different rules for nexus and sourcing, and changes continue to take place (New Mexico, for instance, shifted from “Origin” to “Destination” sourcing on September 1, 2021). Therefore, TaxCompliant does not guarantee the accuracy of these data. It is highly recommended that retailers contact state departments of revenue or taxation for more complete up-to-date information. A general reference to these departments is provided by the Federation of Tax Administrators at this link: https://www.taxadmin.org/state-tax-agencies.

Another valuable resource for determining nexus and sourcing is available through the Sales Tax Institute: https://www.salestaxinstitute.com/resources/economic-nexus-state-guide.