I read excepts from a sales and use tax study yesterday that chilled me. 95% of companies polled had a problem with nexus (i.e., they were liable for taxes in another state) and 85% of companies underestimated the number of states where they needed to be registered.
The study was done by a group called Sabrix, Inc., and surveyed companies in a wide range of industries, with revenues ranging from $3 to $170 million.
Nexus is the term used to describe business activities that create a liability to pay state sales taxes. Historically nexus has been triggered by either having a physical location in a state or employees in a state. Not too long ago that definition has expanded to include hiring independent contractors or attending trade shows. Today, hungry states are stretching the definition of nexus even further, including selling a certain dollar amount into a state and the so-called “amazon tax” where online retailers are being dragged into a state simply because they have affiliate marketers in that state.
The problem with expanding nexus definitions is inconsistency. We’ve got 50 states and literally 50 different definitions of what it means to have nexus. This is something businesses who participate in trade shows often find out the hard way. For example, in some states, a business can come in and out for up to 30 days in a year before being found to have nexus. In other states that number can be less – a lot less. In Texas, a single event is enough to create nexus, even if you made no sales and and just passed along information.
Of course where there’s inconsistency, there’s going to be assumptions and errors. If you’ve got a 30-day window in one state, why wouldn’t you have a 30-day window in others? Unfortunately, as far as most state auditors are concerned, your lack of knowledge is not their issue. There are penalties to be assessed and interest to be paid.
If you do business across state lines, here are some things to be very aware of:
* Do you do trade shows? If so, how many states do you exhibit in, how often, and for how many days at a time?
* Do you have any employees in a state?
* Do you have independent contractors in a state?
* Do you sign contracts in other states?
* Do you send people across state lines to perform installations or conduct training?
* Do you deliver across state lines in your own vehicles?
All of these things can be nexus triggers.
The other thing to watch out for is a nexus questionnaire. These are tricky little tests that states will randomly send out to see who’s doing what. Not answering isn’t an option under state law. But answering incorrectly, or incompletely can lead to a state auditor making a determination that isn’t true.
Nexus is an area that we have explored for some time now and will continue to do so. There’s plenty of information on our Forum on nexus, and we’re also working on a new teleseminar to explore this topic in more depth. Stay tuned!