Do you have to collect sales tax on transactions in a given state? Nexus is the determining factor.
In the past, nexus was created once a steady physical presence, whether by people or property, was established within a state or jurisdiction. A Supreme Court decision changed all that, allowing other factors to determine nexus.
Each state has its own nexus creation laws. You can create nexus without any physical presence at all.
Determining Sales Tax Nexus
Determining sales tax nexus is a complicated process and it is best to consult with a seasoned sales tax professional. Generally, a retailer’s nexus falls under the power of the US Constitution under the Due Process Clause and the Commerce Clause. Under the Due Process Clause, a definite link or minimum connection between the state and the business must be made. Under the Commerce Clause, more concrete connections need to be established and the business must have a presence in the state before the business can be taxed.
Nexus is established in most states by maintaining, occupying, or using permanently or temporarily, directly or indirectly, or through a subsidiary, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business. Having a representative, agent, salesman, canvasser, or solicitor operating in a state under the authority of the retailer or its subsidiary on a temporary or permanent basis can establish nexus.
In addition, states can now set a threshold for “economic nexus” or define online transactions as taking place in their state for a variety of reasons.
Nexus has changed and will probably continue to change as states change laws to meet modern commerce practices. Reviewing sales tax nexus on a regular basis with a sales tax professional or when changes in your business occur is a good way to ensure your company maintains a high level of sales tax compliance.
Failure To Recognize Nexus
Failing to pay sales tax in states where your company has nexus, whether you are aware of the liability or not, can lead to crippling fines and penalties. Laws are applicable regardless of your business’s intention and you will be held liable for the difference if an audit is conducted. As they say, ignorance of the law is no excuse for breaking it.
Two Types Of Nexus For Remote Sellers
Since the Wayfair decision, states have turned to two basic types of nexus to impose sales tax requirements on online sellers. The nexus models are called “click-through nexus” and “affiliation nexus.”
The details of these two models vary by state, but have some common attributes:
Click-Through Nexus: Online sellers who meet a minimum sales threshold in a state may be considered to have established nexus for no other reason.
Affiliate Nexus: A remote retailer who holds a substantial interest in, or is owned by an in-state retailer, and the retailer sells the same or a similar line of products under the same or a similar business name, or the in-state facility/employee is used to advertise, promote, or facilitate sales to an in-state consumer.
Keep in mind that affiliate nexus laws are in constant flux as states are coming to terms with the changing retail and marketing landscape. Be sure to consult your state’s affiliate nexus laws if affiliates or subsidiaries are part of your company’s marketing strategy.
5 Activities That Can Sometimes Create Nexus
While these examples do not encompass the thousands of ways your company can create nexus, these are some of the most common:
- Traveling Salespeople: Temporary salespeople in a state other than your own can result in sales tax nexus. Every state has different policies regarding traveling salespeople so you need to look at every state individually. In Oklahoma for example, one salesperson can make one sale within the state for a single penny, and that transaction will create nexus for the company.
- Fulfillment House: Instead of having their own warehouses to store inventory and ship orders from, some businesses will use a third party known as a fulfillment house. If your business uses an out-of-state fulfillment house, you may have a nexus in the fulfillment house’s state.
- Drop Shipping: Drop shipping is where the end customer places an order for goods with a retailer, who then orders those goods from a vendor. In this system the retailer doesn’t maintain an inventory, instead the product is shipped directly from the vendor to the final customer. In some states, such as Florida, New York, California, and Texas, this action could create nexus in the participants’ respective states.
- Affiliations: An affiliate program is where you recruit outside marketers to promote your business or products. Some states give retailers a nexus if they have had one or more affiliates generate a minimum amount in combined sales within the state over the past year.
- Trade Shows: In many states, making sales or taking orders for taxable goods at a tradeshow means that you have to collect sales tax on those orders.
Sales tax compliance extends far beyond invoices and transactions so keeping open lines of communication between your sales tax team members and the rest of your company can help mitigate unknown sales tax liabilities.
Knowing where your business has nexus is the first step in making sound sales tax decisions. As a business owner, you are responsible for finding out where and when you must charge sales tax. While we would love to say that that task is an easy one, the truth is that state laws are constantly changing and what may be the rule today could be outdated tomorrow.
Speaking with a sales tax expert before making a sales tax decision could save you time and money down the road by lessening the chance of an audit. Using technology that helps you better manage sales tax compliance also can reduce the time and money spent on sales tax compliance. Sales tax nexus doesn’t have to be a black cloud hanging over your business, but it does need to be followed to the letter of the law as best as possible.
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