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State Nexus Policies: Can Out-of-State Servers Create Nexus?

author photo of Jerry Donnini

As technology continues to change, so does the moving target as to what exactly gives a company nexus within a particular jurisdiction. Although there was no significant change in federal legislation or new Supreme Court cases interpreting nexus, states continue to flex their muscles and become more and more aggressive in imposing nexus to the unsuspecting business. We often get phone calls and emails from taxpayers wondering how much activity is enough to give them the dreaded nexus with a state.

By way of brief background, “nexus” is fancy legalese meaning a connection or link. If a company has enough of a connection or link to a state, then the state can impose its laws on the business and require it to charge, collect, and remit state taxes such as sales tax. In 1992, Quill v. North Dakota was decided, which announced that having a physical presence in a state was sufficient nexus to require a company to follow a state’s state and local tax laws. In other words, if your business has an office, a warehouse, some inventory, or a person (employee and yes, an independent contractor), then it likely has nexus under the physical presence test in Quill. In our current economy, is something as small as a server enough to create the requisite nexus Quill was talking about?

It is virtually impossible to keep up with all state developments on a regular basis, however, numerous surveys are conducted to determine a state’s position on the most current nexus developments. According to multiple surveys, the most recent count is at least 36 states will impose nexus from having a web server in a jurisdiction. Of those, at least 26 will impose nexus if a company leased a server from a third party. Imagine a state determining that your company has nexus for leasing a server in a state that you may not even know exists. Also, of note, at least 16 jurisdictions take the position that nexus is created by having a cloud based provider in a jurisdiction with only a significant number of customers being billed in that jurisdiction.

For the unsuspecting retailer simply having servers in states that they don’t know about, nexus can be a looming problem from a state tax perspective. Even worse, if a company was is not registered in a state, there is no statute of limitations to cut the liability to 3 or 4 years. This can be crippling for many small and medium online retailers. If this sounds like you, then it is likely time to get an experienced sales and use tax attorney involved.

About the Author: Mr. Donnini is a multi-state sales and use tax attorney and a shareholder in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog .

Questions? If you have any questions please do not hesitate to contact him via email at or call 954-642-9390.

Other recent “Sales Tax Nexus” posts by Jerry Donnini:

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3 Responses to State Nexus Policies: Can Out-of-State Servers Create Nexus?

  • Posted by John on March 31, 2015 7:40am:

    The sad reality is that nobody pays use tax and the states are too lazy to police it, so they throw the hot potato over the wall to small businesses to make them do their work.

  • Posted by John on March 31, 2015 7:37am:

    So even if a company has no physical presence in a state, not even a click-through site presence, but they sell via the phone, email, USPS and an out-of state WEB site, the states may "impose" nexus on an unsuspecting small business, right?
    Remember "Taxation without representation?"
    Caused this country!
    Thousands of small businesses ( under $5MM) would literally go broke if subjected to this tyranny by states. Or they will simply stop servicing customers in those states.

    • Posted by Author photo of Jerry DonniniJerry Donnini on March 31, 2015 8:00am:

      Thanks for the comment. Technically the state should tie nexus to some physical presence. The proposed legislation may be based on some sales threshold. I hope that is helpful and responsive.

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