Written by attorney Ronald L. Bueing

An Overview of Nexus for Businesses Engaging in Multistate Activities

For many businesses one of the most perplexing questions involves the obligation to register and pay taxes in states outside of the state where the business is primarily located. The legal term for the requisite connection with the state that will allow that state to tax a business is "nexus." Nexus can vary between the states based on differing interpretations of the federal standards. Further, nexus can vary based on the type of tax involved.

Sales Tax Collection

Under the US Supreme Court case, Quill v. North Dakota, a physical presence standard was established for nexus with regard to the requirement that a business collect retail sales taxes within a particular state. Subsequent cases have established that this physical presence must be more than a mere slightest physical presence, but how much activity actually constitutes a physical presence under this rule has been the matter of much controversy in recent years.

What has been clearly established is that physical presence nexus can be established by not only missionary sales employees of a business, but also by the activities of independent contractors working on behalf of a business. It is also clear that the activities of these employees or independent contractors must be engaged in for the purpose of establishing or maintaining a business within the state. Thus, the physical presence of sales representatives within a state, whether employees or independent contractors, will create a requirement that a business collect retail sales taxes of that state.

Much controversy surrounds the presence of business representatives at a tradeshow or convention held in a state. Some states have very specific rules allowing a business to participate at a tradeshow within the state for a particular number of days during a year without creating nexus. While mere attendance at a tradeshow or convention will not create nexus in most states, participation in the tradeshow can create nexus. It is imperative that businesses monitor these activities closely to determine if the tradeshow activities of the business can be seen as creating nexus within a particular state.

Many businesses are not aware that the activities of an affiliate can create nexus for company within a state. The problem arises when the affiliate of a business performs activities within a state that are performed for the purpose of establishing or maintaining a market for that business within the state. Companies such as Barnes & Noble that operated an online book selling company along with retail stores in states have faced much litigation on this issue. Under seemingly identical facts, some states have found nexus based on the affiliate’s activities, while other states have found no nexus for the business because the activities of the retail store affiliate were not aimed at establishing or maintaining a marketplace within the state for the online business. No hard and fast rule can be stated; instead the facts of each individual situation must be carefully analyzed to determine whether the activities of one affiliate can cause nexus for another.

Online businesses have recently been assailed by states that have adopted statutes that presume nexus with a state based on a realtionship with certain independent companies that operate websites that drive traffic to the online sellers. These presumptive laws began in New York and have spread to other states. Most of the state efforts have been directed at larger online companies such as and, but the rules have a much wider application. Online businesses with significant retail sales into these states need to examine the nature of their relationship with companies that perform nominal activities on their behalf, such as directing traffic to their websites.

There are any number of activities that can create nexus for company within the state even when such activities are performed by independent contractors. For example, in-state distribution services, warranty repair services and installation services are considered by most states to create nexus even when performed by independent contractors.

Finally, there is the question of whether delivery of product into a state by company owned vehicles can create nexus. While most states adhere to the general rule that mere delivery of product into a state will not create nexus, not all states adhere to this rule, with some states asserting nexus based on the frequency of the delivery activities. Further, even delivery by an independent company can create nexus if the company providing the delivery service also provides significant other services such as assembly or installation.

State Income Tax

The rules for determining nexus for state income tax are even more complex than the rules regarding nexus for sales tax collection. Because Quill did not specifically address taxes other than sales and use taxes, many states have asserted that the physical presence requirements of Quill are not applicable in determining nexus outside of the arena of retail sales tax collection. These states assert that nexus can be established by means of "economic presence." This economic presence nexus merely requires that a business purposefully direct its business activities at a state. This is similar to the jurisdictional standard that is used for purposes of determining whether a business may be sued within a state other than its home state.

States that impose economic nexus requirements, also generally provide for some level of safe harbor for smaller businesses. The safe harbors will allow a business with payroll, property or sales under certain specified levels to avoid nexus within a state. As budget deficits have tightened, more states have adopted economic presence nexus standard. Under these standards, businesses that purposefully solicit customers of the state through online websites, through the mail or by out-of-state telephone solicitation will be treated as having nexus within the state for income tax purposes.

A handful states do apply the physical presence standard for the creation of nexus for income tax purposes. The rules for determining nexus in the states for income tax purposes are very similar to those used for purposes of determining nexus under the sales tax collection rules discussed earlier. Once again, it should be noted that this physical presence nexus can often be established by activities as innocuous as investigating the credit worthiness of clients or debt collection and enforcement activities.

A federal law, Public Law 86-272, provides a limited protection from state income tax nexus for companies whose only activities within a state involve sales of tangible personal property. As many businesses have added service offerings, many businesses no longer qualify for Public Law 86-272 protection. For those businesses that limit their activities exclusively to the sale of tangible personal property, nexus will not be created due to solicitation activity if orders are sent outside the state for acceptance and rejection and the orders, if accepted, are filled by shipment or delivery from a point outside the state.

The critical issue in determining whether a business is eligible for Public Law 86-272 protection is the determination of whether the company’s activities within the state exceed "solicitation." Under the US Supreme Court decision Wisconsin Department of Revenue v. Wrigley, a company is allowed to engage in solicitation activities and activities that are ancillary to solicitation or are de minimis. Most states follow the Multistate Tax Commission's guidance on Public Law 86-272.

Under this guidance, solicitation includes speech or conduct that explicitly or implicitly invites an order as well as activities that do not explicitly or implicitly invite an order, but are entirely ancillary to a request for an order. De minimis activities are those activities, which taken together, establish only a trivial connection with the taxing state. Some examples of activities that states have treated as unprotected activities include:

  1. Making repairs or maintenance service to the property sold;
  2. Collecting current or delinquent accounts;
  3. Investigating credit worthiness;
  4. Conducting training courses, seminars or lectures for customers or for personnel involved in activities other than solicitation;
  5. Providing any kind of technical assistance or service, such as engineering assistance or design service, if the purpose is other than the facilitation of the solicitation orders;
  6. Repossessing property;
  7. Maintaining an office within the state; and
  8. Maintaining inventory within the state.

Other Taxes

States also vary in their treatment of nexus for taxes other than sales taxes and income taxes. In fact, some states use differing nexus standards for taxation of different activities within the same taxing scheme. For example, the state of Washington uses a physical presence standard of nexus for sales of tangible personal property, but uses an economic presence nexus standard for sales of services. In general, most states will use either the physical presence nexus standard or economic presence nexus standard.


Rules for determining nexus, i.e. whether a business is subject to tax in the state, are complicated and depend on a variety of factors including the nature of the taxing scheme adopted by the state, the state’s interpretation of constitutional nexus standards, the nature of the business activity engaged in by the taxpayer and the extent of activities performed in or directed at a particular state. Taxpayers that are not well-versed in the intricacies of determining state tax nexus should consult with a tax practitioner that is specifically experienced in handling these issues. Failure to correctly analyze nexus creating activities can lead to substantial penalties. Further, companies that carefully structure their activities may be able to avoid significant and costly taxes.

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