Lately with state and local governments operating on fumes, taxing jurisdictions are looking to step up collection of taxes from companies that may be doing business in their jurisdiction, but not necessarily with their home office located there.
The term nexus is used to describe the connection between your activities in a jurisdiction and your obligations to collect and remit sales tax as well as pay state income or franchise tax.
The easiest nexus to understand is when a company is based in a state, doing business in that state, has employees in that state, and customers in that state. Clearly there is a solid connection that requires a company in this situation to collect and pay sales tax on all taxable revenue and pay state income or franchise tax where appropriate.
When a sale crosses a state border (and thus becomes an interstate transaction) the nexus becomes more complicated and one must consider the implications of the both federal law and state tax codes.
If a company has a sales office in a state other than the one in which it is headquartered, it generally establishes a nexus and sales tax, income or franchise tax must be remitted for sales that occur in that state. For this reason it is important to register as a foreign corporation or entity in the second state. Usually you do this with the state’s secretary of state or business licensing division. This also means you must handle regular reporting for the jurisdiction you are a foreign entity in.
It is important to keep in mind that most states do not allow you to begin selling taxable goods or services until you have a sales tax permit in their state. Some states have harsh penalties for violating their law regarding sales tax permitting.
In most states, if you are an online retailer, you must collect sales tax for any sell that ships within that state. If you ship outside your state to a customer in a state where you have no sales representative or office, you normally aren’t required to collect and remit sales tax to either state.
It is easy to become confused because many states have special provisions in their laws that do not adequately address clear nexus.
Keep in mind that nearly all states will send tax auditors to your place of business regardless of your location if they believe you have violated their rights to properly collect sales tax. Many large states have sales tax auditors located in other states where there is enough business to warrant.
The good news is most sales tax collection agencies are willing to explain their rules and law to you so don’t hesitate to pick up the phone and call a state agency responsible for collecting sales tax for their clarification. It is better to err on the side of caution.
Here are two good resources that explain nexus in more detail:
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