I recently received the following question which poses a good example of what constitutes Nexus and what doesn't.
A company is headquartered in State X and manufactures a product sold all over the country. It has a salesforce (most of whom are manufacturer’s reps) that have territories throughout the U.S., and all the sales force does is take orders. This company, through its sales force, sells to dealers and retailers in State Y, who in turn sell to the public and collect the sales tax at the time of sale. The company sells a small amount of accessories to it main product via the internet or by phone. It has no physical presence in State Y, no office, no warehouse, etc. Should it have to collect sales tax when selling these accessories via internet or phone I mentioned above?
In short, the answer is yes. Under the assumed facts, the manufacturer has nexus with the State Y and should have registered with the state and collected tax on the sale of the accessories.
In general, “nexus” is defined as the minimum connection or physical presence that must exist before a state can impose sales tax liability and reporting requirements on out-of-state companies. The creation of nexus is not dependent upon taxable sales being made in a state but rather the existence of in-state activities that constitute a “sufficient physical presence.” An obligation to register with the state and collect tax on all taxable transactions is born once nexus has been established by a sufficient physical presence in the state. Thus, once nexus has been established, a proverbial line has been crossed and the obligation to collect tax spreads to all sales made into the state whether or not such sales would have created nexus on their own.
In the given example, nexus was created in State Y by the physical presence of the wholesale sales force in the state. As stated above, it does not matter that this in-state presence was only related to exempt wholesale transactions. Once nexus has been established in a state, a company is under an obligation to collect tax on all other transactions regardless of whether those transactions would have created nexus by themselves. Thus, while the sale of the accessories would not have created nexus by themselves, nexus had already been created and the company should have registered with the state and collected tax.
On a related side note, if a company has nexus with a states but no taxable sales, most states still require the company to register and file zero dollar returns. This is especially relevant for wholesalers who are often in such a situation.
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