Clients are increasingly challenged with running and growing their business while complying with ever-expanding tax, particularly in the state and local tax arena.
The first step with assisting your clients with their multi-state obligations is determining whether they have the obligation to file; specifically, determining Nexus.
Nexus: A client is deemed to have nexus where that client has “sufficient contacts” with the state or locale to succumb to the jurisdiction of the tax authority and obligation to collect and remit tax.
The challenge we face as practitioners, however, is that the definition of “sufficient contacts” set forth in the Quill case continues to expand and explaining this complicated landscape to a client is not easy. Thus, it is important to gather some fundamental information about the clients’ business as part of the initial analysis of nexus:
- Identify all states where the client has sales. Also, in states like AL, AK, AZ, CO, ID, IL, and LA, identify the local jurisdictions where your client makes sales as these places have some local registrations and reporting requirements.
- Identify all states where client has people. People includes sales, corporate or other employees. This information should also include any contractors or agents acting on company’s behalf. This area tends to trip up a number of companies as they assume that contractors will not create nexus. In addition, in most states having agents such as dealers or other relationships where a third party is selling, servicing, repairing, or delivering your goods or services for a commission or fee will create nexus.
- Identify all states where the client has property. Property includes tangible, intangible, real property and inventory. This property can be either owned, rented or offered on approval to consumers.
- Identify any related entities and activities between the companies. Find out whether the affiliate conducts any advertising or other services for or on behalf of your client in any states.
Many times clients assume that activities they engaged in throughout the various states are treated equally by all states for purposes of nexus. While many states adhere to the similar standards for nexus such as physical presence, economic, affiliate, and click-through nexus, the manner in which these standards are interpreted vary widely.
Thus, once you gather information related to your client’s activities, further analysis of the state or local rules is necessary to make a final determination of nexus. Here are some common activities that constitute nexus in various states:
- Physical presence in a state such as an office building, field office, or warehouse owned or rented by the company.
- Employees or contractors working in a state.
- Intangible and tangible property in a state including inventory and equipment owned or rented by the company.
- Having an affiliate in a state.
- Remote sellers with online links provided by residents in a state (i.e. click-through nexus).
- Software as a Service(SAAS), Infrastructure as a Service (IAAS), or downloads by your customer in a particular state.
Keep in mind that these definitions and rules continue to evolve as does your client’s business. Accordingly, revisit your nexus analysis with your client periodically to ensure they stay in compliance with filing requirements.
The original article appeared on the Taxnologi blog site.