Fulfillment Knowledge Base

Introduction and Overview to Nexus

The terminology “nexus” has numerous definitions and applications but where technology is concerned, this is a standard debugging interface for a number of embedded systems. In the most general of terms, nexus is defined as a connection. However, the terminology also applies to tax laws in which a business maintains a physical presence in that particular state. It is subject to the taxes of the state that the company is operating in and applies to the taxes on sales made by that company in that state.

The different states in the US are able to tax business entities because of the way in which a nexus defines and describes the amount of business activity, as well as the degree of it that must be present before business taxes apply. If a business/taxpayer in a particular state has nexus, the business/taxpayer is obligated to charging, collecting, and remitting taxes in that particular state. So what determines nexus? Nexus is determined for income and sales tax purposes although the determination is different for each type of tax.

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Sales Taxes for eCommerce

How sales taxes have impacted eCommerce

According to the Census Bureau of the US, sales taxes account for one-third of state revenues. Unfortunately, the states lost billions of dollars because sales taxes were not being collected on online sales for many years. According to the Center for Business and Economic Research in a report that was published in 2009, lost revenue due to uncollected sales taxes was approximately $34 billion. Consequently, many states today are now cracking down on online businesses and lobbying for new federal tax guidelines that apply strictly to these business entities.

Under most of the current state laws, online companies are not required to collect sales tax from customers who make their purchases through mail order or online. Responsibility for the payment of sales tax falls on the consumer. However, enforcement of this is extremely difficult which ultimately results in what is called a “de facto tax-free” environment. As a result, the tax penalties incurred by companies who have integrated their land-based and internet operations are pretty substantial.

As an example, the nation’s largest retailer, Wal-Mart, announced in the beginning of 2000 that they were launching an internet site that was a spin-off of Wal-Mart.com, the retailer’s original website that was integrated with their land-based operations. By establishing a separate retail entity online, Wal-Mart was able to avoid any penalties for not collecting sales taxes. The result was that companies today who launch and integrate an online entity in conjunction with their land-based operations are responsible for charging sales taxes.

Research that was conducted at the time by Austan Goolsbee, a former associate economics professor at the University of Chicago’s Graduate School of Business, examined the impact that sales taxes would have on e-commerce. With the current situation, the price of online consumer products has been directly affected by the non-payment of sales taxes. According to Goolsbee, "Charging sales tax is the same as increasing the price of a product or service and if you increase prices, people will stop buying." On an interesting side note, Austan Goolsbee was recently appointed by President Obama to be the chief economist and staff director of the Economic Recovery Advisory Board.