A nexus refers to a connection between a taxing jurisdiction, such as a state, and an entity, such as a business. Only after this connection has been established can the taxing jurisdiction impose taxes on the entity. It also requires that the two parties possess a certain link.
The link that serves as the ground of establishing a nexus varies by jurisdiction, but in general, the entity must commit a certain action in the jurisdiction. For instance, a company XYZ and a state might be considered to have a link if a company XYZ has an office there, if it recruits employees there, if it manufactures products there, or if it operates a warehouse in that state.

Income Tax Nexus vs. Sales Tax Nexus

There are two main types of nexus under tax law, namely income tax nexus and sales tax nexus.
An income tax nexus might be established if a company XYZ profits from utilizing the resources of a certain state A, engage in activities beyond solicitations, or have a property or capital asset there.
On the other hand, a company XYZ might have sales tax nexus in a certain state if it meets one or more of the following conditions:

•  It maintains an office or operates a physical location there.
•  Its employees/salespeople are working regularly there.
•  It has either or both tangible and intangible properties within the state.

Types of Sales Tax Nexus

Historically, a sales tax nexus can only be established if an entity was physically present in that state. However, the increasing popularity of online transactions has forced a lot of states to amend their rulings regarding the required link for a sales tax nexus to be formed. The following are methods currently applied in determining a nexus for online transactions:

Click-Through Nexus

Is a direct buyer-seller connection that requires the in-state entity to meet the minimum sales threshold in that state. The sales come from commission payments that the entity receives by referring sales to a remote seller via click-through referrals from the in-state entity’s website.

Affiliate Nexus

Pertains to the connection between an entity with another entity, wherein entity 1 (affiliate) uses the platform of entity 2 (e.g. online marketplace) to obtain sales. A great example of this setup is the Amazon Affiliates program. For instance, a business XYZ (affiliate) sells its products on Amazon. The affiliate is not an employee of Amazon, but an active connection exists between them, and states use this connection to collect sales taxes.

Economic Nexus

Is established once an out-of-state retailer meets a certain number of transactions (threshold) within a state. The retailer isn’t required to be physically present in the state. As long as it sells over a specific amount, an economic nexus might be formed.

Next Read: Do I Need to Collect Sales Tax in Other Countries?