Got a small biz? Then pay attention to today’s blog. It’s the horror stories of what can happen when you ignore nexus in another state.
Take a look at the past week’s blogs to get a bit of a heads up on what nexus is and how easy it can be to fall under another state’s tax umbrella.
Here are some real life stories of people who found out how easy it was to get stuck with a nexus issue.
A Few Seminars and Suddenly You Owe $1 Million!
A large financial coaching company has a tried and true model of offering free seminars across the US, then getting people to sign up in the back of the room’ for more expensive programs and coaching sessions.
They don’t make money, per se, from the initial promotional free seminars, but it does make a contact with people in the room.
And the big company made two major mistakes. First, they failed to register for sales tax in each of the states in which the seminars were held. Since they were collecting money in the back of the room, they needed to pay sales tax on that money.
Secondly, by having a physical presence in the state, they also created nexus in many states that went beyond just the sales in the back of the room. For example, if you do business one day in the state of Michigan, you have established nexus. So a one day seminar in Michigan, would mean that from here on out, you need to collect and pay sales tax on any sales made to a Michigan resident, even if it was done via mail, fax or the Internet.
They got caught. Total checks for sales tax, interest and penalties totaled over $1 million.
Now that’s an expensive lesson!
iTunes tax on downloads
An online education company thought they had the whole sales tax thing dialed in. They had formed their online company in state income tax-free Wyoming and offered all their products for sale online as digital and PDF downloads. So, there was no physical product for sales tax.
Easy, right? Wrong! They had made a number of nexus mistakes that actually had established a nexus for them in both Arizona and Colorado. One of the owners of the company lived in Colorado and they frequently held seminars there and stored various company items there. They had a full-time assistant who lived in Arizona. She handled sales calls and closed clients, just iike the owner in Colorado did.
Still, these nexus hooks weren’t enough (at least pre-2010) to pull the income into an income tax issue. It was enough for sales tax nexus, but since all they sold were downloads, they figured there was no tax.
Wrong! Arizona and Colorado both have a sales tax on digital downloads. It’s called the iTunes tax, but it’s not just on music – it’s a sales tax that applies to ALL downloads.
Worse yet, Arizona has a 6 year statute of limitations, so they can go back for 6 years to calculate the tax (and considering their budget, probably will). And then they have 6 years after that assessment to collect it.
If you sell digital downloads and have nexus in any of these states, look out!
These 18 states (plus the District of Columbia) tax digital downloads:
- District of Columbia
- New Jersey
- New Mexico
- South Dakota
Morale of these stories:
Know where you have nexus. Then take the extra step to determine what is subject to sales tax.