Physical Nexus Requirement

Traditionally, states impose sales tax on the sale of goods and services when the seller has a physical presence in that state, a requirement known as a “Sales tax nexus.” This nexus can be established through various means, such as opening a store or office or hiring employees in the state. 

However, physical presence is not always straightforward to determine. The degree of in-state activity required to create a physical nexus may vary by state. In some jurisdictions, even limited activities, such as in-state visits by employees, independent contractors, or business representatives, may establish nexus. For example, in states like Colorado, a short visit by a retailer to sell at special events involves selling can be considered physical presence in the state, establishing a sales tax nexus.  

In some states, an isolated visit to a state may not, by itself, create a physical nexus. For example, Washington provides an exception under which attendance at a single qualifying trade convention during a calendar year may not constitute physical nexus.

Therefore, whether a nexus exists depends on the nature, frequency, and purpose of the in-state activities, as well as the specific laws of the state involved. Accordingly, businesses should evaluate the nexus rules in each state where they conduct activities, as the definitions and thresholds for physical nexus vary across jurisdictions.

A foreign seller may be considered to have a physical presence, which could create a sales tax nexus in a state. Please note that these may vary by state.

The following are some of the examples through which a foreign seller may create a physical nexus in a particular state within the United States:

• Owning or leasing real property in the state (e.g., retail stores, warehouses, factories, offices, manufacturing facilities, etc.)
• Owning or leasing tangible personal property in the state (e.g., machinery, equipment, products, etc.)
• Maintaining inventory in a state: Physical nexus generally arises when a business owns inventory that is stored within a state. 

Further, even including inventory held in third-party warehouses may create sales tax nexus. For example, a seller using Amazon FBA (Fulfillment by Amazon) can create a physical nexus in a state if Amazon stores the seller’s products in a fulfillment center there. Even though Amazon runs the warehouse and handles shipping, the inventory belongs to the seller, so it could create nexus. 

California is a strong example where storing inventory in a third-party warehouse, such as Amazon FBA, may create a physical nexus for foreign sellers.

• Having employees or independent representatives in the state, including remote employees
• Attending trade shows withing a state to sell or take orders for sales or services. For example, in Texas, out-of-state sellers attending a trade show, fair, or similar event are generally considered engaged in business in the state and could create sales tax nexus. 
• Providing services in the state.
• Delivering merchandise in the state, but it could depend heavily on how the delivery occurs. For example, in Texas, if a business uses its own vehicle to deliver items, it may create a physical presence nexus.

Now that we have discussed how a physical nexus may be created by a foreign seller in a particular state. Next, let’s discuss the consequences of having a physical nexus for a foreign seller in that state.