For a family owned shop on Main Street, their sales tax situation is relatively straightforward. They are required to collect and remit to the appropriate authorities the applicable sales tax for their state, their city, and the other municipalities they may fall within. (This is tax we’re talking about, so the emphasis really needs to be on “relatively”–tax situations are rarely simple.)
But what about a company whose business crosses state lines? What if, say, a company were based in Illinois but sold products in Illinois, Indiana and Wisconsin? Does it need to collect sales taxes in all three states?
The key concept to answering questions like this is nexus. The basic rule is this: if you are “doing business” within a state, then you owe sales tax on that business. What constitutes “doing business” within a state? That’s where nexus comes in.
Nexus is the term for all your connections, contacts, links, with a given political jurisdiction, a state in this case. Once your nexus passes a certain point (and where exactly that point lies is the crux of many sales tax disputes), you are considered to be conducting business within that state and thus you are required to charge sales tax on your business there.
The clearest precedent on nexus comes from a 1992 Supreme Court case. In the case the Court held that physical presence was the litmus test which counted. This helped clear up some of the gray area, but plenty of ground was left uncertain. Especially in the case of online and mail order retailers (that second group tends to get left out of the headlines but they have just as much, possibly more, of a stake in the current debate as Amazon) the debate has recently come to a head. The new laws passed in Illinois and other states say that having affiliates within the state is sufficient nexus to be doing business within the state. This would allow Illinois and the other states who have passed such laws to tax online and mail order retailers, but in practice it has led to Amazon and similar companies canceling their affiliate programs to avoid the taxes.
For more information on nexus and how business in a state may alter your tax situation, contact the Chicago tax attorneys at Horowitz & Weinstein.