Nexus! It’s not medical condition, or something to be feared! Unless, that is, you’re a company that has decided to “do business” in a state other than the state in which your business is currently located.
Whether you’re a small, medium, or large business, you’ve likely realized that in order to remain competitive in today’s economy, you may need to expand outside of your home state. Perhaps you’re considering opening a sales office, branch or retail location in another state; perhaps you’re considering hiring employees who are residents of other states; or, perhaps you’re considering pursuing new accounts in other states. Unless your company confines all of its business activity to the state in which your business is located, you may be a subject to “nexus.”
But what, exactly, is this “nexus”? And if your business finds it is has “nexus”, what does that mean?
If you Google the term “nexus”, you’ll get numerous hits that are unrelated to the state tax “nexus” that is the subject of this two-part post. For instance, “Nexus” has been the name of an Australian, an Argentine, an Estonian, and a Greek band. “NEXUS” is also the name of the joint US-Canadian program designed to allow pre-approved, low-risk travelers to expeditiously cross the US-Canada border. A song entitled “Nexus” was recorded by the late artist, Dan Fogelberg. “Nexus” is also the name of a student publication of the University of Waikato, New Zealand.
Look up the word “nexus” in a dictionary, and you’ll find a definition such as “a means of connection; a link, or a tie”. As a tax practitioner, when I think of “nexus”, I automatically think of state tax nexus; that sufficient “connection” or “tie” to a state that requires a “taxpayer” to comply with a state’s tax laws. Bring together a room full of CPA’s, tax consultants and tax attorneys and you’ll hear terms like “economic nexus”, “substantial nexus”, “agency or affiliate nexus”. You’re likely to hear references to significant court decisions, such as, Quill, National Bellas Hess, Geoffrey, Lanco, and others; decisions that have shaped the state tax landscape over the years. I’d almost guarantee that you’d hear a reference to Federal Public Law 86-272; the federal interstate commerce law enacted in 1959 as a temporary measure to address Congress’ concern that states would tax businesses beyond what they should under the U.S. Commerce Clause.
The area of state nexus, as it relates to income, sales & use, or other business taxes, is highly complex, has been the subject of much judicial debate over the years, and is continually evolving. But whether you’re the owner of the company, the CFO, the controller, the bookkeeper, the tax accountant, or someone else charged with the responsibility of understanding the state tax implications of expanding outside your state, your main concern is understanding which activities might cause your company to have state tax nexus and what the implications are if you find you do have nexus.
Part 1: Sales & Use Tax Nexus and the Requirement to Collect and Remit
State taxation is indeed a complex area, as you’re dealing with not just one set of laws, but the laws of all fifty states, as every state imposes some type of state tax. Therefore, in part 1 of this two-part series I’ll focus on nexus for sales tax purposes.
Historically, sales tax nexus has been based on having a physical presence in the taxing state. Therefore, activities such as the following can create sales tax nexus: (1) owning or leasing a physical location in a state, e.g., a sales office, distribution center or storefront, (2) owning or leasing personal property in a state, (3) using company owned vehicles to deliver your company’s products to customers in the state, (4) warehousing inventory or other property in the state, (5) employing residents who will perform their job responsibilities in the state, (6) having employees, regardless of whether they are residents of the state or not, who regularly solicit sales in the state, (7) sending out-of-state employees into the state to attend tradeshows or seminars, (8) performing repairs in the state, (9) providing training to customers in the state whether through employees or contractors.
Keep in mind, that these are only a few examples of activities that will generally create sales tax nexus. While states do vary in their interpretation and application of how much and what activity is required to create sales tax nexus, what is certain is that states are becoming more and more aggressive; not surprising given the current deficits in many state budgets. Not only are states taking actions such as increasing their sales tax rates (e.g., Massachusetts’ 2009 rate increase from 5% to 6.25%), or expanding what is subject to sales tax (such as by adding services, telecommunications and other transactions to the sales tax base), but some states are enacting laws which require companies that have no physical presence in a state to be subject to the state’s sales tax laws. These laws are primarily directed at businesses that sell over the internet and which have a contract with “affiliates” (residents or other businesses which are not necessarily a part of their own company or organization) to secure sales in states in which a selling company has no physical presence. These laws have been nicknamed “Amazon laws” after their most visible target, and because Amazon.com challenged the New York version of this law, and lost. Under these “Amazon laws”, which exist in some variation in Rhode Island, North Carolina and Colorado, companies that have no physical presence in a state are presumed to have sales & use tax nexus if the out-of-state company is paying more than a minimal commission to an in-state resident or business for customer referrals. A typical scenario involves an out-of-state retailer contracting with an in-state “affiliate” who posts a link to the out-of-state seller’s website and receives a commission.
But recent developments in aggressive state tax trends are topics for future blogs. The important take-away from today’s post is to note that if your business is planning on expanding (or has already expanded) into new states and you clearly establish a physical presence in these states you may well have sales tax nexus, and therefore, should be registered as a sales tax vendor in those states. Furthermore, if you’re expanding into a state that has an Amazon law in effect, and sell over the internet, your business may be subject to sales tax nexus even without physical presence in the state. Along with having sales tax nexus in a state and being required to be registered, comes the responsibility of charging the appropriate sales tax rate on all taxable transactions, and remitting the sales tax collections to the state or other jurisdiction in a timely manner. In some jurisdictions, the sales tax is not limited to a state sales tax, but may include a county, city, school district, and/or parish sales tax. Once sales tax nexus has been achieved, failing to comply with the state sales tax laws can lead to inquiries, assessments, audits and headaches. Understanding your business’ expansion plans and activities in other states, as well as the state sales tax laws is extremely important. Seeking the advise of a knowledgeable tax professional or CPA is equally important. Having sales tax nexus doesn’t have to be painful experience!
Join Me for Part 2: Nexus for State Corporate Income Tax and Other Business Taxes
“Although a business may find that its activities create nexus for sales tax purposes, these activities do not necessarily create nexus for state income tax purposes.” In my next post, I’ll continue the discussion on nexus and focus on state corporate income and other types of business taxes. Please join me as I continue this exciting exploration into state business taxes.
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