Sales tax obligations in the United States arise at the state level and depend on whether a business has sufficient connection, or “nexus,” with a particular state. While the concept is often presented in simple terms, in practice it requires careful consideration of how and where a business operates.

General framework

A business is generally required to collect and remit sales tax in a state where it has nexus. Historically, this was based on physical presence. More recently, economic activity has also become a determining factor.

As a result, nexus may arise either through physical presence in a state or through exceeding certain thresholds of sales or transactions within that state.

Physical presence

Physical presence remains a primary basis for nexus.

This may include:

• maintaining inventory in a state
• using warehouses or fulfillment providers
• having employees or representatives located in the state
• operating from an office or other facility

Even limited physical presence can be sufficient to create nexus, depending on the circumstances.

Economic nexus

In addition to physical presence, most states have adopted economic nexus rules.

These rules are typically based on:

• total sales into a state
• number of transactions

Once a threshold is exceeded, the business may be required to register, collect, and remit sales tax in that state, even without any physical presence.

The thresholds vary by state, but commonly include a sales threshold (e.g., $100,000 or higher) and, in some cases, a transaction count.

Role of structure and operations

Sales tax obligations depend not only on where customers are located, but on how the business is structured and how transactions are carried out.

For example, inventory held by a third-party fulfillment provider in a state may create nexus for the entity that owns the goods. Similarly, the use of distributors, agents, or other in-state representatives may affect the analysis.

In multi-entity structures, it is important to consider which entity is making sales and how activities are allocated across the structure.

Timing and registration

Nexus does not always require immediate action at the moment it arises, but it does establish an obligation to register and begin collecting sales tax within a reasonable period.

A common issue is that nexus arises before it is identified, particularly in cases involving economic thresholds or third-party fulfillment arrangements. This can lead to periods where tax should have been collected but was not.

As a result, monitoring activity across states is an important part of managing compliance.

Common issues

In practice, sales tax issues often arise where:

• inventory is stored in states through fulfillment providers without being fully considered
• economic thresholds are exceeded without tracking
• the entity responsible for sales is not clearly defined
• collection obligations are identified after the fact

These situations can create exposure that accumulates over time, particularly where sales volumes increase.

Practical approach

Managing sales tax obligations requires a structured and ongoing approach.

This typically involves:

• identifying where physical presence exists
• monitoring sales activity by state
• determining when thresholds are met
• registering and implementing collection where required
• ensuring that systems reflect applicable state and local rates

The objective is to ensure that obligations are identified early and addressed in a consistent manner.

Conclusion

Sales tax nexus arises from the way a business operates across states, rather than from a single factor.

Understanding where nexus exists, and how it develops over time, is key to ensuring that obligations are properly addressed and that the structure remains aligned with the underlying operations of the business.

Cross-border structures are often established with a clear objective, whether related to operations, tax, or regulatory considerations. In practice, however, issues frequently arise where the structure, as designed, is not fully aligned with how the business operates on an ongoing basis.

These gaps are not always immediately apparent. They may develop over time as the business evolves, or arise where different elements of the structure have been implemented independently. While the structure may appear appropriate in form, inconsistencies in how it functions can lead to compliance and operational challenges.

Misalignment between structure and activity

A common issue arises where the legal structure does not reflect the actual conduct of the business.

For example, an entity may be designated as performing a particular function, while in practice that function is carried out elsewhere. Similarly, management may be formally located in one jurisdiction, while decision-making occurs in another.

Such misalignment can affect how the structure is viewed from both a tax and regulatory perspective, particularly where activities are assessed based on substance rather than form.

Intercompany arrangements not clearly defined

In multi-entity structures, relationships between entities are often not fully documented or consistently applied.

This may include:

• services provided between entities without formal agreements
• transfer of funds without clear characterization
• use of intellectual property without defined terms

Where these arrangements are not clearly established, it can be difficult to support how transactions are treated across jurisdictions.

Inconsistent treatment across jurisdictions

Another common gap arises where the same arrangement is treated differently in different jurisdictions.

For example, an entity may be treated as transparent in one jurisdiction and as a separate taxpayer in another, or a transaction may be characterized differently depending on local rules.

Without coordination, these differences can result in mismatches in reporting, recognition of income, or application of tax rules.

Operational processes not aligned with structure

Even where the structure itself is appropriate, issues may arise where day-to-day processes do not follow the intended framework.

This may include:

• funds flowing in a manner inconsistent with the structure
• contracts entered into by entities not intended to perform the relevant activity
• accounting and reporting not reflecting intercompany arrangements

In such cases, the practical operation of the business may diverge from the documented structure.

Compliance addressed after the fact

In some cases, compliance is approached as a separate step, rather than as part of the structure from the outset.

This may result in:

• reporting obligations identified only after transactions occur
• documentation prepared retrospectively
• gaps in filings or inconsistencies in records

While such issues can often be addressed, they may require additional effort and can create exposure over time.

Practical approach

Addressing these gaps requires viewing the structure as a whole and assessing how it operates in practice.

This typically involves:

• reviewing the role of each entity
• aligning management, ownership, and activities
• establishing clear intercompany arrangements
• ensuring that operational processes follow the intended structure
• coordinating reporting and compliance across jurisdictions

The objective is not only to correct individual issues, but to ensure that the structure functions consistently as the business evolves.

Conclusion

Compliance gaps in cross-border setups often arise not from the initial design of the structure, but from how it is implemented and maintained over time.

A structure that is aligned in both form and practice is more likely to withstand scrutiny and support the ongoing operation of the business.