Like most things in America, the US Constitution controls how the government is allowed to tax its citizens. The Founding Fathers’ approach was to require a definite link between a state and the entity it wants to tax, and being scholarly folk, they chose a Latin word to signify this link: NEXUS.

Nexus means ‘connection’, and it is the legal test that states must use to implement tax laws. Every state has its own sales tax requirements and each can prescribe its own definition of sales tax nexus that compels a business to comply with their laws.

Historically, states were only allowed to use physical tests to determine nexus. For example, having an office or warehouse, employees or even contractors in a state can create what is called Physical Nexus. However, a landmark ruling by the US Supreme Court (South Dakota v. Wayfair, 2018) eliminated the physical presence rule as the standard for creating nexus in a jurisdiction and gave states the right to implement Economic Nexus rules. Instead of focusing on whether the business has a physical presence, states can look at their business activity. The number of transactions or amount of revenue a seller has in a state is now the determining factor for states to compel compliance.

The result is a wave of “remote seller” registration obligations. Previously, if a New York-based business sold to California but didn’t have a physical presence, they were not obliged to register in California. Now, if the NY business breaches the threshold imposed by California – they are said to have Economic Nexus and must register for sales tax and start charging Californian sales tax rates on eligible transactions. The concept of remote sellers having to register is not limited to US businesses – non-US sellers are also subject to Nexus rules and might be legally obliged to comply.

It is therefore imperative that ALL businesses around the world understand the nexus requirements in the 47 US states (including DC) that have sales tax and ensure that if their business activity or setup creates physical or economic nexus, they register immediately.