Nexus in the New Millennium

The CPA Journal’s Millennium Series continues in this first month of the first year of the new era with an examination of “nexus,” a critical and contested taxation concept in the vernacular of e-commerce.

Because e-commerce retailers (e-tailers) are not required to collect and remit sales taxes unless they have a physical presence in the tax jurisdiction where a customer is located, many tax authorities and traditional (brick-and-mortar) retailers claim e-commerce has an unfair advantage. To fully seize this advantage without causing tax problems, e-tailers must structure their brick-and-mortar and online entities so that the two businesses are different enough—even to the extent of not offering the same products through both outlets—to satisfy the nexus-watchers.

Although the concept of “presence” is nebulous, the U.S. Supreme Court has held that if the sole connection between a remote seller and its customers is a common carrier or the U.S Postal Service, the seller is not required to collect state sales tax. Courts in New York have held that nexus requires more of a connection than storing Internet ads on a server or using an Internet service provider (ISP) located in the taxing jurisdiction.

As retailers continue to use the Internet to change the way American consumers shop, tax authorities will continue to try to stay ahead of a game where the rules continue to change. q

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