Sales tax nexus defines the level of connection between a taxing jurisdiction such as a state and an entity such as your business.Until this connection is established, the taxing jurisdiction cannot impose its sales taxes on you.Nexus determination is primarily controlled by the U.S. Constitution, in which the Due Process Clause requires a definite link or minimal connection between a state and the entity it wants to tax, and the Commerce Clause requires substantial presence.In South Dakota v. Wayfair, the Court eliminated the physical presence rule within the Commerce Clause as the standard for creating nexus in a jurisdiction.
However, physical presence will still create nexus and is the first consideration in determining nexus. In the lead up to the Court’s decision, many states enacted new types of economic nexus legislation to address how sellers conduct business today.There is no specific shared definition of nexus across the 50 states. Moreover, definitions and rules for determining nexus change constantly, and most states are careful to give themselves room to maneuver in their definitions. This means that a business must look at each state individually when determining sales tax nexus and must stay constantly on top of a slew of changing regulations and interpretations.Here are a few representative definitions of Nexus that most states would more or less agree with. Stay Informed On Sales and Use TaxJoin the Sales Tax Institute mailing list and get updates on the latest news, tips, and trainings for sales and use tax.By submitting this form you are agreeing to join the Sales Tax Institute’s mailing list so the Sales Tax Institute can send you email notifications including our monthly newsletter, monthly sales tax tips digest, information about upcoming courses and sales tax resources. Submitting this form will add your email to our mailing list.
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Nexuscan be a hidden danger for a company with a multistate presence.Certain activities might cause nexus for sales and use tax, incometax, franchise tax or other business taxes. One key to successfullynavigating these widely varying provisions is for tax professionalsto review the statutes and rulings of each state in which a businessclient might be considered as doing business. The connection mightnot be obvious, particularly for sales and use tax.
And some stateslevy types of taxes that might not be familiar to business ownersand managers, such as those on gross receipts or business activity.Another,less well-known key is familiarity with states’ provisions forvoluntary disclosure and amnesty. Businesses might need a CPAexperienced in negotiating with the state or states in question touse these tax controversy resolution tools, especially if theydidn’t think they had nexus for an earlier period but belatedlydetermine that they did.NEXUSAND TYPES OF TAXSalestax.
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Federallaw requires a state to have “substantial nexus” to a seller torequire that seller to collect sales and use tax. The definition of“substantial nexus” has always been a subject of contentious debatebetween states and businesses. Generally, however, it means having aphysical presence in the state, whether by salesperson, contractor,location or a number of different events (see Quill Corp. V.North Dakota, 504 U.S. 298 (1992), and National Bellas Hessv.
Department of Revenue, 386 U.S. Owning orleasing tangible personal property or real property in the state isusually considered to establish sales-and-use-tax nexus. Dependingon the state, some other common activities that can result in nexusare listed in the sidebar, “Nexus Study Overview and Checklist,” below.Income,franchise and other business taxes. Havingnexus for sales tax purposes does not necessarily mean a taxpayerwill have nexus for income tax purposes, as a higher level ofbusiness activity may be required. Historically, state income taxnexus has been created when an out-of-state company derives incomefrom sources within the state, owns or leases property in the state,or employs personnel who engage in activities that go beyond those“protected” under federal interstate commerce laws.
Under 15 USC §381 (commonly referred to by its 1959 enacting legislation, PL86-272) states imposing a tax based on or measured by net income maynot impose that tax on out-of-state taxpayers whose only connectionwith the state is the solicitation of orders for sales of tangiblepersonal property when such orders are approved and shipped fromoutside the state. Reviewany audit findings for the last five years. Were proceduresput in place to remediate any issues previouslyidentified?Oncethe checkup is performed, all of the findings are captured in areport with a recommendation for remediation of any issues.
Anyrefund opportunities should be highlighted while any exposureamounts are identified and the liability added to the company’stax reserves account.Nexus Study Overview and ChecklistInaddition to a sales-and-use-tax diagnostic “checkup,” abusiness should consider a nexus study either in conjunctionwith or following the diagnostic checkup. While the focus ofthe checkup is to identify areas of tax exposure risk,internal control weaknesses and refund opportunities, thegoal of a nexus study is to gain an understanding of abusiness’s potential nexus-creating activities in thevarious states, and determine a company’s nexus profile. Thefollowing is a checklist of activities a CPA or taxconsultant should perform when completing a nexusstudy:Completea nexus questionnaire. This document will likely containmany of the typical questions that might be found in astate-issued nexus questionnaire, and should focus onactivities that indicate nexus, such as whether a companydoes any of the following in other states:.
Chargesa license, royalty or other similar fee for the use ofits intangibles (trademarks, trade names) to related orunrelated entities (income taxnexus).Asthese are only a sample of typical questions, additionalquestions are likely to be included, particularly where acompany engages in a unique business activity or is in aspecial industry.Conductin-depth interviews with company management and otherpersonnel whose job responsibilities could impact acompany’s state nexus profile. Such interviews:. Mayuncover other functional areas that should beinterviewed, for example, engineering, training andwarranty departments.Oncea company’s multistate activity is thoroughly comprehended,analyze this information in conjunction with state law,administrative guidance, court decisions and otherpronouncements that help to interpret a state’s position oncertain activities, to opine on a company’s nexusprofile.Calculatean estimate of nexus exposure.
For sales tax, this might bebased on factors such as the number of periods since nexuswas established, the amount of taxable sales and sales taxrate in effect for each period, and the applicable interestand penalty for those periods.EXECUTIVE SUMMARYBecause state business taxes differ in type andstandards, multistateenterprises need to assess their nexus with respect toeach state in which they do business. If they belatedlydiscover nexus exists, they also need to know aboutamnesty and voluntary disclosure programs available inmost states.Businesses generally have nexus for sales and use taxeswhen theyhave a physical presence in a state. Owning or leasingreal or personal property in a state can establishphysical presence, but less obvious nexus-creatingactivities can include providing services and makingdeliveries other than by mail or commoncarrier.Nexus for state income taxes generally requires thatincome be derived from sources within a state or viaactivities in the state beyond soliciting orders for salesof tangible personal property that is shipped from outsidethe state. However, a number of states levy franchisetaxes for the privilege of doing business in those statesand variants of gross-receipts taxes, for which nexus issimilar to that for sales taxes. Also, some states haveasserted “economic nexus” based on an economic connectionto the state independent of any physicalpresence.Activities of an agent or affiliate can create nexus.
. On June 21, 2018, South Dakota v. Wayfair, Inc.
Overturned a 1992 Supreme Court ruling; states can now require ecommerce businesses to pay sales taxes where those businesses have an economic presence (or nexus). The process of tracking individual state sales taxes that enforce economic nexus can be daunting, time-consuming, and expensive. Shopify Plus partner Avalara, a cloud-based state sales tax compliance solution, makes it easy and affordable to automate this labor-intensive burden. “With many remote employees located in different states, we take our nexus very seriously. Avalara has significantly reduced the administrative complexity of a remote working company.” — Lisa Bradley, co-founder & CMO of R. RiveterThere’s a common accounting mistake that many ecommerce businesses unknowingly make that can cost millions of dollars and even lead to bankruptcy.If your ecommerce business sells to customers all over the United States and is in hyper-growth mode, you’re going to want to keep reading or you might face an unexpected lawsuit. On June 21 of this year, the U.S.
Supreme Court ruled that states are within their constitutional rights to collect sales taxes on purchases made from out-of-state online retailers.The decision overturned a 1992 ruling, known as Quill, that prohibited states from charging sales taxes to companies that don’t have a physical presence within the state.Because of this new ruling, your business is now on the hook for tracking and paying sales tax in every state in which you meet the threshold for economic nexus. If that isn’t stressful enough, each state has its own set of rules for sales tax.Worse: in some states, counties and cities also have this power — meaning that businesses will need to understand and continually stay up to date as laws change across over 12,000 jurisdictions in the U.S.Keeping track of each individual state’s specific sales tax laws and economic nexus thresholds — and ensuring that your business doesn’t get sued — can be an expensive, ongoing challenge.That’s why we’ve put together a comprehensive guide to help you.1. Understand Why States Want to Enforce New Tax LawsBefore ecommerce, remote sellers in the U.S. Were mostly catalog retailers, accepting orders through the mail and via telephone.
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They only collected and paid sales tax on transactions with buyers in states where they had a physical location.Then, North Dakota passed a law in the 1990s requiring sales tax collection from all retailers that advertised to customers in the state. Was a Delaware catalog retailer selling office supplies with locations in Illinois, California, and Georgia. The company sold office supplies to North Dakota customers by phone and mail order and shipped catalogs to residents.Quill refused to pay the sales tax, and North Dakota sued. The result was a: Quill didn’t have to collect sales tax from North Dakota customers — neither did any other company that didn’t have a substantial physical presence in the state.Back in 1992, remote sales accounted for only a small fraction of total retail and few people even had an email address or shopped online. Even a decade after Quill, in 2002, ecommerce still only amounted to $42 billion in the U.S.Today, that number sits at $504.6 billion and rising:Data viaAmazon saw the Quill decision as an opportunity to grow without tax regulations that could hamper the growth of traditional retailers. As long as it didn’t maintain a in a state, Amazon didn’t have to charge and remit sales tax to the sales tax jurisdictions in the U.S.Quill had another benefit for Amazon: consumers realized they could save a little money from websites that didn’t charge sales tax, bringing more shoppers online. As a result, a that ecommerce transactions from out-of-state businesses were tax-free.In reality, consumers are supposed to pay use tax on these sales, but.
Sales tax revenue losses amounted to.Something had to give. Taxes would need to be increased significantly, critical state services would need to be cut, or somehow — in spite of Quill — ecommerce sales would have to be taxed. Know How South Dakota v.
By. May 22, 2017This post was last updated on July 5, 2018Forty-five states and Washington D.C. All have a sales tax.
What Constitutes Nexus In California
But every state is different – the exact laws that create sales tax nexus in one state may be a little different in another. This post lists all the states and a link to sales tax laws with the exact wording they use regarding what business activities create sales tax nexus.Remember, if you have in a state, you need to:. Charge sales tax to customers in that state regardless of how you sold them a product or from where that product shipped. in that stateAlso note that it’s almost impossible to avoid (meaning if you live or work in a state then you’ll probably have nexus there), so this list focuses on what constitutes nexus for out-of-state sellers.
Keep in mind that in many cases what we think of as “sales tax” when we pay it as referred to as “use tax” when collected and remitted by an out-of-state seller.If you’re wondering if you have sales tax nexus in a state, find it below to read what that state’s laws and/or main taxing authority has to say about sales tax nexus. What Conditions Create Sales Tax Nexus in Every StateNote: Most definitions of nexus include the terms “doing business” or “engaged in business.”– details what creates sales tax nexus in Alabama. Starting after the South Dakota v. Wayfair Supreme Court ruling on June 21, 2018, Alabama also says that some sellers have economic nexus. Read more about.– Arizona’s guide details what creates sales tax nexus in Arizona.– The Arkansas Department of Finance and Administration’s “” publication from 2008 details nexus on page 1, under “F.