How is nexus created

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. As you read them, you can almost feel the steel jaws starting to clamp around you:.

Other states may set their own economic nexus threshold, but it must prove to not impede on nor create an undue burden on interstate commerce. South Dakota v. Wayfair established what would be considered acceptable to the Federal courts as being constitutional. These definitions—which focus around having a business presence in a state—are just starting points for determining nexus.

There are innumerable details, timescales, vagaries, and state-by-state idiosyncrasies involved. The point is, if you have knowingly or unknowingly created nexus in a state, then you are subject to some very strict obligations.

Click-Through Nexus legislation typically requires that a remote seller meets a minimum sales threshold in the state in question resulting from activities of an in-state referral agent. The legislation may not always require common ownership. Marketplace Nexus legislation typically means that if an online marketplace operates its business in a state and provides e-commerce infrastructure as well as customer service, payment processing services and marketing, the marketplace facilitator is required to register and collect tax as the retailer rather than the individual sellers.

This could also impose reporting requirements on the marketplace facilitator. If the business cannot prove an exemption, then the default position of many states is that the sales are taxable and the business has nexus, assuming the law removes exempt sales from the threshold. To make things even more complicated, there could be different criteria for meeting the same exemption in various states. To identify businesses that might have a sales tax collection and reporting obligation, some states are sending letters to business owners asking them to fill out a nexus questionnaire.

In some cases, the business is presumed to have nexus until it proves otherwise via the questionnaire and any supporting documentation the state demands. These questionnaires generally attempt to extract as much information from businesses as possible, with the states' goal being to determine what taxes can be assessed and how far back the liability goes, and to make an assessment based on this determination. When a nexus questionnaire is haphazardly filled out, this is only the beginning of numerous problems.

Even when there is credible evidence to the contrary, a state will inevitably go back to the answers provided in the nexus questionnaire when those answers support an assessment. That is why a careful, well - thought - out response is critical to mitigating exposure. In some instances, audit staff for the state simply wish to make an assessment and force the company to fight the assessment in appeals if the business disagrees.

Even in cases of full cooperation, some states have taken a position to impose the maximum penalties and are willing to maintain penalties through litigation.

Businesses often do not expect such punitive measures to be taken against them when they cooperate with a state's taxing authorities. Many business owners are faced with a difficult decision — pay to fight an assessment, pay an assessment they do not owe, or go out of business.

However, it is critical to remember that even after going out of business, personal liability potentially endures. The unfortunate bottom line is the states may not be concerned whether a business goes under. Another consideration is future business registrations. Numerous states are pursuing businesses of all sizes if they use Amazon's Fulfillment by Amazon FBA service or other similar fulfillment services.

The FBA service allows a seller to provide inventory to Amazon, which then takes the inventory and moves it to whichever warehouses it deems appropriate without the business knowing beforehand where the inventory is going. When a sale by the business is made on Amazon, Amazon removes the inventory in the warehouse and ships it to the customer. States are potentially obtaining from Amazon lists of businesses that have inventory in an Amazon warehouse located within the state.

This is one way in which the states are targeting businesses. Sometimes, states will find out about inventory being stored in the state before the business does, as Amazon can change where inventory is stored daily. Therefore, it is often not a question of if, but only a matter of when, the business will be contacted by the state with a nexus inquiry letter. The position of the states on FBA services is simple — if a business has inventory in the state, the business has nexus via a physical presence in the state and is required to collect sales taxes.

The states behave as if clients can dictate to Amazon where it stores inventory; however, nothing is further from the truth. The states' aggressive stance on this issue seems to disregard federal constitutional principles, which usually require businesses to have some minimal contact with a state before the state can assert its taxing power.

In fact, it has been our firm's experience that after pointing to recent federal court cases discussing this type of issue and the unconstitutional nature of the states' actions, the states say those cases do not apply and the tax assessment stands.

To say the least, many states have been emboldened by Wayfair , but not as much as one state Florida that has argued Wayfair applies retroactively or another state Kansas; see the discussion below that asserts no minimum sales threshold must be met to require collection of sales taxes. The most straightforward method of establishing nexus is to have a physical office with employees in a jurisdiction.

However, this concept goes far beyond a physical office. This article will explain eight ways that you could establish nexus and how your company can work toward complete compliance with the law when you work with TaxConnex.

Sales tax nexus is the concept that enables state and local governments to require businesses to collect sales tax on the products and services they sell. One of the first legal judgments governing this concept was ruled on by the U.

Supreme Court in This decision found that the state of Illinois had no basis for requiring National Bella vs. Hess, a catalog merchant with no physical presence in the state, to collect and remit sales tax from its customers. The physical presence standard was reinforced by the U. Supreme Court once again in in the North Dakota vs. Quill case. In the decision of South Dakota vs. Wayfair , a new form of nexus was confirmed — economic nexus.

In this landmark decision, the U. This was the court's response to the taxpayer's argument for use of the physical - presence standard for corporate income tax. The court highlights the requirement for a "significant" economic - presence test. Arguably, transactions do not necessarily rise to the level of "significant" economic presence, especially when dealing with sellers of relatively low - dollar items.

In several income tax nexus cases involving the licensing of intangible assets, namely trademarks, the courts have found that the licensing of such intangibles between related entities is a revenue - generating activity that rises to the level of economic presence.

In these cases, the licensing of the intangible was not the main business activity of the licensing entity. Should a similar standard apply for sales tax, if related and nonrelated entities charge for the use of intangible assets? Arguably, if such transactions meet the above economic nexus standards, those entities have an obligation to file and report sales tax.

Not much has been litigated in this area, so taxpayers should be aware that just because states have imposed these standards does not necessarily mean that they would pass muster if litigated within state and federal courts. For states, it may make sense to leverage what has been litigated and resolved for income tax and use the same threshold in the sales tax area so that the measure is standardized and streamlined for taxpayers, thereby allowing for the use of income tax data to determine whether a taxpayer has a sales tax collection obligation.

To the extent a legally obligated company does not collect sales tax from its customer, then the tax owed becomes a liability on the taxpayer. As such, most companies have their books and records reviewed by independent third - party audit firms to evaluate and confirm state and federal tax liability, and having a standardized measure for nexus across state and local tax jurisdictions would make this easier for auditors.

Generally, audit firms place a higher priority on federal and state income tax liability rather than sales tax. In a post - Wayfair world this needs to change, and taxpayers should be aware a potential substantial liability relates to sales tax since states are now employing an economic nexus measure.

It should be reviewed quarterly in a manner similar to income tax. Further, companies should set up a reserve for potential sales tax liabilities in states where they operate.

Remote sellers should also consider contingencies required to be booked related to potential liabilities stemming from exceeding nexus thresholds. Some states are ostensibly working to make sales tax compliance and collection easier for taxpayers.

Some examples include websites that allow users to manually calculate sales tax based on address, or an application programming interface e. A majority of states now have such a lookup tool in one form or another. Arkansas has a tool for searching by ZIP code or address.

Washington state's lookup tool incorporates a state map, allows searching by geographical coordinates, and calculates the tax for any given taxable amount of sale. Colorado's site incorporates a clickable map and provides a breakdown of tax rate components. Further, states such as Colorado and Alaska are working on unifying sales tax collection for local jurisdictions with administrations, rules, and reporting requirements independent from those of the state government. Arizona has already unified all local filing on the state return to reduce the complexity of compliance, although the Form TPT - 2 , Transaction Privilege, Use and Severance Tax Return , is far from simple to complete.

Also, a handful of states, such as Alabama and Texas, have provided a unified state and local rate for internet sellers to provide greater ease of compliance. Other options offered by states to reduce penalties associated with noncompliance include voluntary disclosure programs.

Be forewarned, though, that sellers are not automatically eligible for these programs. Sellers who believe they qualify for a voluntary disclosure program will need to seek permission to participate. On the other hand, some states are taking an aggressive approach in seeking out taxpayers for compliance with the new nexus rules.