Nexus Theory

By Jason Watson, CPA
Posted Monday, October 18, 2021

Nexus is a Latin word meaning to bind, join or tie. Simply stated, tax nexus is the minimum amount of contact between a taxpayer and a state, which allows the state to tax a business on its activities. Every state defines nexus differently using terms such as physical presence or economic presence, and those concepts will be discussed in a bit.

There is also a concept called trailing nexus where an entity that once had nexus in a state ceases activities that created nexus in the first place. This is a point of contention between taxpayers and states, and is commonly created by Fulfillment By Amazon (FBA) and other online retailers since product (and therefore physical nexus) is continuously moving around.

The theory behind the trailing nexus concept can be better illustrated with an example. If your business sent a sales rep to Washington for several months to solicit orders, it is safe to say that after the sales rep leaves a residual effect would remain. This in turn would generate sales (business activity). As an aside, Washington is one of the few states that defines trailing nexus explicitly. Pot + Coffee = Progressive Law.