Even in the best of circumstances, nexus can be difficult to navigate and as such, it’s important that you monitor your clients’ businesses for nexus.
You need to constantly stay on top of your retail clients’ level of activity, visibility of the activities and sales transactions. This is where many of the complexities and state-by-state idiosyncrasies raise their heads.
Even with the South Dakota v. Wayfairdecision, you still must monitor physical activities as this still creates nexus regardless of the economic thresholds. This will require you to monitor the frequency and duration of your clients’ visits to a jurisdiction, and being aware of each jurisdiction’s rules.
Certain activities might have safeguards to limit nexus. These not only vary by state, but also by activity. Here are some examples of important questions to ask:
1. Do they participate in trade shows? Trade show rules differ by state. In California, it takes 16 days of trade show activity in a 12-month period to create nexus, but in Texas, just one day suffices. In addition, the type of activity your clients perform at a trade show could produce different results. If they bring inventory to the trade show and make sales and delivery, every state is going to require them to have a permit and collect tax – at least for the duration of the show.
2. Do they have employees actually residing and working in a state? In all states, that, alone, is enough to create nexus.
3. Did they sign a contract in a state? That significantly raises the chance of nexus, even if it was an agent and not an employee who signed.
4. Did they send anyone to perform installation, repair or training services? If so, they’re creating nexus, whether it’s their agent or employee providing the services; note this also creates income tax nexus.
5. Did they ship products into a state via common carrier, or company leased or owned truck? If it’s a common carrier, they’re probably okay, but if they own or lease a truck, they’ve likely created nexus.
Economic Nexus Evaluation
If your clients don’t have any physical activities, then you must move to the economic evaluation. You’ll need to calculate their total sales into the states and count the number of transactions.
States vary as to what is included in the sales transactions test. Most will look at gross sales into the state, while a handful are using retail sales (taxable and exempt, but excluding sales for resale) and just a few are using taxable sales. For updated information, look at the detailed news item for each state by clicking here.
The visibility of business activities helps determine how easily the state will find them, but not whether they have nexus. States have greatly improved their ability to find remote sellers and identify presence in the state that creates nexus, and states are finding new ways to target remote sellers.
Several states, including California and Washington, have contacted Amazon FBA (fulfillment by Amazon) sellers directly. Some of the states have also filed subpoenas, requesting lists of third-party sellers from marketplace providers. Amazon complied with these demands after fighting the first few and losing.
For trade shows, if the show is open to the public, your clients might have actually talked to an auditor, telling them everything they can do for them. Plus, the auditor might have actually visited their “place of business” trade show booth.
If your clients advertise locally, including providing in-state contact information in phone and industry directories, they have a target on their back. And, if they’re selling to any state or local agencies, their nexus is now well known, as most states cross-reference their suppliers against the registered taxpayer database.
In fact, some states prohibit the government from contracting with a supplier that isn’t registered to collect sales and use tax in their state. Make sure your clients alert their sales team that if any government contract or trade show registration packet includes a sales tax registration form, they send it to the finance or tax group for completion.
Economic Impact of Activities
We’ve talked about what nexus is and how your clients get it, but they can have all the nexus in the world without any issue at all, or a gigantic issue. This is what we call the economic impact of their activities.
Understanding the dollar value of their average sale into a jurisdiction, when their sales and other activities commence and the total amount of sales into a jurisdiction since activities began, all help to determine a potential liability. You must also determine what percentage of your clients’ sales is taxable.
Some sales will qualify for an exemption, but you must know which ones are exempt and make sure they obtain proper exemption certificates for their exempt sales. Don’t count on being able to get them after the fact because that isn’t always allowed or realistic.
If all your clients’ sales are exempt, they might not have much to worry about in terms of liability. However, whether they choose to register or take the chance of discovery by the state depends on their risk tolerance. Not being registered leaves the prior periods open indefinitely in most states.
Are your clients gamblers or risk-adverse? Help them sort nexus out to remain compliant.
Diane Yetter, CPA, MST is president and founder of YETTER, a sales tax consulting and tax technology firm in business since 1996. She is also founder of The Sales Tax Institute, a premier think tank that offers live and online courses to educate business professionals about...