Definition
Nexus is the connection that gives a state the power to require a seller to collect and remit sales tax. It can come from physical presence, such as an office, inventory, or employees, or from economic activity. After the Supreme Court's 2018 decision in South Dakota v. Wayfair, many states adopted economic nexus thresholds, commonly based on sales dollars, with some states also counting transactions. Thresholds and measurement periods vary by state.
Why it matters in an audit or review
Auditors consider whether the entity has uncollected or unremitted sales tax for states where it has nexus. This is a loss contingency under ASC 450, with accrual if probable and estimable, and disclosure if reasonably possible. Remote and online sellers are common exposures. Management's nexus study, filing records, and marketplace facilitator arrangements are evidence.
Example
Illustrative: a company sells online into 20 states and registered in three. The auditor asks management for a nexus analysis, evaluates whether exposure in the other states is probable and estimable, and tests the accrual and disclosure.
Common mistakes
Assuming marketplace platforms handle all sales tax without confirming for each state and sales channel.
FAQ
Are service sales taxable?
It depends on the state. Many states tax goods more broadly than services.
Sources
- South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)
- FASB ASC 450-20-25 and 450-20-50, Loss Contingencies
- State revenue department rules for each state's nexus thresholds (vary by state)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error