By Diana DiBello
In sales and use tax, nexus is one of the most active areas of debate and analysis. Many an unsuspecting company has been caught in the snares of a state's nexus!
Nexus requirements vary by state and often catch a seasoned tax professional unaware. Unlike income tax, PL 86-272 does not offer protection from sales tax. PL 86-272 or Public Law 86-272, prohibits states from imposing a net income tax on an entity whose only activities are solicitation of orders in that state.
Although the litmus test is simple in terms of where a company has "substantial physical presence," specifically defining physical presence is where numerous, complex state laws, rules, and guidelines enter the equation.
Some of the most interesting landmark cases involve nexus. The most frequently referenced is Quill Corp. v. North Dakota, 504US298 (1992), but in order to understand the impact of Quill, we must go back to an even older case, Complete Auto Transit v. Brady. This case outlines four tests that outline a state's ability to require a company to collect tax so that the collection of the tax does not violate the commerce clause of the Constitution. These four prongs cover activities that link an out-of-state vendor to the state, including connected activity, discrimination against out-of-state vendors, fair apportionment of the tax to the presence, and the taxpayer receiving benefits fairly related to the amount of tax paid.
Technology has prompted a number of states to question the validity of a physical presence test. Consequently, many states try to extend their reach. Recently, New York State attempted to get tax revenues from online retailers. The New York Supreme Court recently dismissed Amazon's complaint that the state overreached its authority by imposing a law to require out-of-state sellers to collect the tax, even though they do not have substantial physical presence. The state's law creates the collection requirement for any company that has referral relationships with in-state entities.
Each state's statute defines the minimum contact threshold to require an out-of-state seller to collect the tax, and it is important to understand each state's requirement because they do vary. For example, attending a trade show may be sufficient contact with the state to create nexus, depending on the length of time or frequency of attendance.
Contractors can be another source of nexus. Even though they are not employees, they represent the organization and, therefore, create the necessary connection. Even in-state volunteers can create nexus in some states. This was the case in Scholastic Book-Clubs, Inc. v. California Board of Equalization, where teachers who collected book orders and sent the payment to the company were deemed to be acting as "agents" for the company.
Finally, voluntarily registering and collecting the tax for customers may create nexus and require the vendor to continue to collect the tax. In other words, losing nexus is much harder than you think. In addition, some states require a vendor to continue to collect for 12 months after it has formally discontinued business in that state.
SpeedTax has created a brief questionnaire designed for companies to quickly determine their risk associated with sales tax compliance. As a QuickBooks ProAdvisor, you can pass this information to your clients and help them determine ways to avoid that often-surprising trap, nexus.
About the author
Diana DiBello is director of Product Development for SpeedTax, a provider of sales tax compliance software solutions. She previously was a senior manager in the State and Local Tax Services Group for Grant Thornton. Contact her at [email protected].