Sales tax nexus, explained simply
A company selling into many states may owe sales tax in states where it has no staff or premises, simply because sales passed the state’s threshold, often $100,000 of sales or a set number of transactions. Many smaller companies never registered, and unpaid tax, interest and penalties accumulate.
Where customers are exempt, such as resellers, exemption certificates must be on file. A buyer may inherit the exposure.
Sales into unregistered states against the nexus threshold
IllustrativeAlder Creek Manufacturing, annual sales, $ thousands
Six states exceed an illustrative $100,000 threshold; the company is registered in none of them.
Two kinds of nexus
| Type | Created by |
|---|---|
| Physical nexus | Offices, staff, inventory or property in the state |
| Economic nexus | Sales into the state above that state’s threshold |
Worked example
Alder Creek is registered only in its home state but ships to 18 states. Diligence finds sales above the threshold in six states where it never registered. After allowing for exempt customers who provided certificates, estimated unpaid tax plus interest is $0.25 million. The buyer treats the amount as a debt-like item, requires the seller to file voluntary disclosures, which usually limit the lookback period, and obtains a specific indemnity.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
A note
This page explains general concepts and is not legal or tax advice. Rules vary by jurisdiction and change over time.
Why it matters in a deal
Sales tax exposure is one of the most common tax findings in lower middle market diligence. In some asset purchases, states can also hold the buyer responsible for the seller’s unpaid sales tax.
Red flags
- Sales into many states with registration in few
- Missing exemption certificates for customers treated as exempt
- No nexus review since 2018