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Help Clients Get a Handle on Economic Nexus


As part of our Ask AccountingWEB effort to more directly answer pressing questions from our accounting audience, we received a question from a reader that has a client who does service contracts nationwide. The client may have physical and economic nexus on a markup of resold services and wanted to know how to recommend compliance to growing companies before the auditor shows up. Here is expert advice from CPA Sona Akmakjian, Global Head of Strategic Accounting Partnerships at Avalara.

Apr 16th 2021
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Accountants and tax pros simply can't help tackle sales tax compliance without first understanding nexus — a company’s economic “connection” to a state based on qualifying sales activities.

Businesses in just about every industry must deal with sales tax in some way, but high-growth companies often struggle the most, and for good reason. Growth equals change and with change comes new or different rules and regulations to follow — many of which may be unfamiliar territory to you, your clients and even to the taxing authorities that enforce them.

Prior to the epic rise of ecommerce, sales tax typically didn’t make the headlines or merit attention from company owners or executives. But the ever-increasing popularity of cloud, mobile and online sales tax has shifted the landscape dramatically, incenting lawmakers to reinterpret the rules and forcing companies to comply.

It’s All About Nexus

Historically, nexus has been linked to a physical presence. In 1992, the Supreme Court of the United States ruled in Quill Corp. v. North Dakota (Quill) that companies without close ties to a state didn’t have to collect tax from customers in that state. However, the growth of ecommerce created a situation states couldn’t afford: loss of tax revenue from buyers purchasing from sellers who had no obligation to collect and remit sales tax. In theory, those buyers should pay use tax on the transactions, but in practice, almost none of them do.

Losses from uncollected tax on remote sales, combined with outdated and inadequate federal legislation, led states to take another tack: expanding the definition of nexus to include a much wider range of activities — many of which are the very tactics employed by companies to grow their business.

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