Physical nexus means that a seller has a physical presence in a jurisdiction sufficient for a state to impose a sales tax obligation. Monitoring physical nexus is crucial for determining whether a business must collect and remit sales tax. The rules governing physical nexus can vary widely depending on the jurisdiction and its tax laws, so it is common to have questions about what criteria can trigger physical nexus.
Employee-types that trigger physical nexus
Traditionally, physical nexus was triggered by a company when there were explicit sales personnel and revenue-generating activities occurring in a state. These laws were enacted when there were precise physical office locations and salespeople traveling to customer offices. As the internet has taken off and remote work is commonplace, the traditional physical nexus rules are being eroded, and states are increasingly asserting physical nexus over more types of employees.
- Employees (full or part-time) — In many states, a permanent employee will typically assert physical nexus, regardless of whether that employee is engaged in sales or revenue-generating activities. Conditions are particularly willing to stretch the boundaries of physical nexus, especially if a company also sells to customers in that state.
- Independent contractors — If your company uses independent contractors to provide services to your customers, they may create a physical presence nexus for your business. Examples of this include using independent contractors to provide training/support services to your customers about your product or using independent contractors to provide sales-related services.
Other factors that trigger physical nexus
In addition to simply having an employee currently living and working in a jurisdiction, other factors can trigger physical nexus, depending on the jurisdiction and its specific tax laws. These factors may include:
- Property in a state — The presence of any significant amount of real or personal property in the state, whether owned or leased. This can sometimes happen for SaaS companies if you own or lease servers in a state.
- Employee(s) visiting a state — Sending employees to trade shows or other revenue-generating events or conferences can be sufficient to create a physical presence nexus. States like New York and Texas — where events like these are common — can be aggressive in asserting physical presence nexus in these cases.
Note: Using a 3rd party cloud provider to host your software (e.g. AWS or Azure) does not create nexus based on where their servers are located.
Anrok's physical nexus monitoring
When you hire a remote employee, you could trigger sales tax obligations in their jurisdiction due to physical nexus. As people move and your business scales, physical presence can be hard to track manually. Anrok allows you to easily monitor physical nexus by manually integrating with your HR system or inputting employee information. At this time, Anrok's physical nexus monitoring can do the following:
Using Anrok's physical nexus monitoring features, you can easily track your tax obligations in a jurisdiction to help you make informed decisions on registering.
Changing physical nexus obligations
If you let an employee go, or an employee moves to a different state, it is common to question whether you still have a physical nexus or a filing obligation in that jurisdiction. Some states will allow you to de-register immediately if you have not met their economic nexus threshold. Other states may require you to stay registered for a specific amount of time (i.e. 6 months to 1 year) before permitting you to de-register. While your continued physical nexus obligation will vary from state to state, you will ultimately need to consider whether the de-registration process is the best next step for your business. When making this decision, there are a few things you should consider:
- De-registration can require a lot of administrative work since states sometimes require a waiting period and will have additional questions (i.e. reviewing prior returns, etc.).
- In states like Texas — where hiring is common — sometimes you will de-register and then immediately have to re-register.
- De-registering and re-registering can cause customer confusion since their tax amount will constantly change depending on your registration status.
Note: De-registration within a jurisdiction is a service that Anrok does not provide. If you decide to de-register yourself, please contact email@example.com so we can adjust your instance accordingly.
Sales volume's effect on physical nexus
If you have an employee located within a jurisdiction but no customers in that state, many states still require you to register for sales tax if you don’t have sales yet. That said, they may cancel your account after a certain amount of time if you continue to have no activity in the state. If you expect to have sales in the jurisdiction within the year, it may be a best practice to go ahead and register so you are compliant from day one on that sale. If you don’t anticipate any sales activity, you may want to hold off to avoid the admin burden of a canceled account and then need to re-register later when sales are imminent.
We hope this guide helped you understand physical nexus obligations. If you have any questions regarding your specific usecase, feel free to reach out to us at firstname.lastname@example.org.