” …state revenue department commando units – their hunting grounds are truck weigh stations, trade shows, large construction projects, and airports, harbors and even marinas. They don’t even have to be out patrolling-they can sit back and conduct highly fruitful Web site and phone directory research as well.” – 8-PAC Editor
Sales tax nexus defines the level of connection between a taxing jurisdiction such as a state and an entity such as your business. Until this connection is established, the taxing jurisdiction cannot impose its sales taxes on you. Nexus determination is written into the US constitution where the Due Process Clause requires a definite link or minimal connection between a state and the entity it wants to tax. After that, nexus gets foggy and complex.
There is no specific shared definition of nexus across the 50 states. Moreover, definitions and rules for determining nexus change constantly, and most states are careful to give themselves room to maneuver in their definitions. This means that a business must look at each state individually when determining sales tax nexus, and must stay constantly on top of a slew of changing regulations and interpretations.
Here are two representative definitions of Nexus that most states would more or less agree with. As you read them, you can almost feel the steel jaws starting to clamp around you:
- “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 this state under the authority of the retailer or its subsidiary on a temporary or permanent basis.”
These definitions-which focus around having a business presence in a state-are just starting points for determining nexus. As we’ll discuss, there are innumerable details, timescales, vagaries and state-by-state idiosyncrasies involved. But the point is, if you have knowingly or unknowingly created nexus in a state, then you are subject to some very strict obligations.
Implications of nexus: what are your obligations?
If you have created nexus within a state or other jurisdiction, you are obliged to register as a retailer and collect and remit sales tax on all taxable sales into that jurisdiction. You are also obliged to obtain exemption certificates on all tax exempt sales into the jurisdiction.
Further, you are also required to remit use tax on taxable purchases if delivered within that jurisdiction and the vendor did not collect tax from you. You also must remit use tax on taxable advertising and promotional items (trade show giveaways, in-store handouts, etc.) that you might distribute in the jurisdiction.
As you might suspect, it is incumbent on you to accomplish all of the above in a timely and accurate fashion. Even when you do it all correctly, you are still potentially subject to audits by the jurisdiction.
Nexus enforcement: strong arm of the law
As federal funding to states has diminished, states have become much more aggressive in identifying and collecting all the tax revenue they can. They are looking harder for transgressors, hiring more tax auditors and sending their auditors out more frequently.
Here are some of the tools and tactics that states use to determine who to pursue and audit:
- Nexus questionnaires are among a state’s primary enforcement tools. States periodically send out mass mailings indicating that the receiving company may be subject to reporting and collecting sales tax in the state. These mailing typically include nexus questionnaires that must be filled in and returned promptly. Ignoring these questionnaires is not an option because doing so can eliminate potential settlement options down the road. Nexus questionnaires are designed to ferret out activities that you may be engaging in within the state, and your answers can trigger further inquiries. Hence extreme care should be taken when responding to their questions. Seeking professional tax help is highly encouraged because simply checking “yes” to some questions can easily lead to a determination of nexus. If your activities in the jurisdiction are limited, it might be better to respond with a letter in lieu of completing the questionnaire.
- Nexus task forces are state revenue department commando units. They are actively looking for companies with activities in the state to prove nexus. Among their hunting grounds are truck weigh stations, trade shows, large construction projects, and airports, harbors and even marinas. They don’t even have to be out patrolling-they can sit back and conduct highly fruitful Web site and phone directory research as well.
- Multi-State Tax Commission audits are another way to get snared. The Multi-State Tax Commission has a joint audit program open to participating member states. Participating states nominate and vote on which companies to target, and the commission then conducts an audit on behalf of all the states concurrently.
- Nexus questionnaires to vendors add yet another net in which to catch you. During an audit, vendor invoices will likely be reviewed. Auditors can thus easily compile a list of a company’s vendors and then send nexus questionnaires out to those companies as well. If there have been charges invoiced for on-site training or other services, that counts as proof that the vendor has had an in-state presence. In fact, a nexus questionnaire might not even be sent – just a notice of an audit appointment.
Boston Warwick LLC