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What is sales tax nexus?

When the term ‘nexus’ is used in conjunction with sales tax, it refers to the connection a taxpayer has with some taxing jurisdiction. In most cases, this connection or nexus is created when the taxpayer has employees or independent contractors working in the taxing state, when the taxpayer owns personal or real property in the taxing state, or when the taxpayer performs services in the taxing state. Having nexus in the taxing state does not automatically mean that the taxpayer has some sort of tax filing or tax collection obligation. It simply means that the state taxing authorities can legally obtain information from the business to help the state taxing authorities determine if there is some tax collection obligation. In order for a taxpayer to have a sales tax collection and remittance obligation, it must have both nexus and some taxable activity in the taxing state. Most state statutes do not use the term ‘nexus’ when describing this sort of connection with the state. Rather, they user terms like ‘doing business’ or ‘dealer’, or ‘conducting business’ to describe the types of activities that give the taxing state the right to request information from the business.

Does my business have sales tax nexus outside of my own state?

If your business has employees that travel to meet with new or existing customers in another state, or if your company uses independent sales representatives to solicit sales in another state, or if your company has inventory or other property located in other states, or if your company rents an office or a warehouse in another state, or if your company uses people in another state to perform services on your behalf for customers in another state, then your company may have nexus. Once your company has nexus, the next step is to determine if your company is doing anything that is taxable in the state.

What are the consequences if my company has nexus in other state but is not filing returns?

If your company has nexus in another state and is selling a taxable product in that state, your company, if audited by that state Department of Revenue, would likely be assessed the tax that should have been collected from your customer at the time of the sale. Your failure to collect tax if you have nexus in a state makes your company liable for the tax until you can prove that your customer either reported the tax to the state himself or herself. This is almost impossible to do, so the state can force your company to pay the back tax, interest, and penalties related to the tax that should have been collected. States can assess tax for all periods that your company had nexus.

There seems to be some confusing rules about nexus; what is the best rule to apply?

The U.S. Supreme Court ruled in 1992 that states can only force companies to register and collect sales tax if the taxpayer has a physical presence in the state. As noted above, physical presence does not mean having an office in the state. It means any contact with the state. Sending employees or independent contractors into the state for 2 or more days a year can create nexus, having property stored in a warehouse or distribution center can create nexus, performing training or repair services can create nexus. Any physical connection between your business and the taxing state can create nexus. Some states are unhappy with this rule, and are developing their own nexus rules that are based on the amount of sales that occur in a state. These are called economic nexus rules. The courts are currently evaluating these rules. Taxpayers must carefully consider how they want to deal with states that assert these ‘economic nexus’ rules. If a company is audited or assessed tax under these rules, it will cost a considerable amount of money to fight these challenges in court.

Are states currently enforcing sales tax on out-of-state businesses?

Yes. States invest significant resources in tracking down and auditing businesses that have nexus in their state and are selling taxable products or performing taxable services in their state. Once a business is contacted for an audit, there is little opportunity to implement liability-minimizing tactics. The only way to minimize exposure and limit the risk is to address these issues aggressively and proactively. States also share information with other states, so it is possible that your company may be contacted by several states over a short period of time concerning an audit.