Helping Clients Determine Nexus Exposure
Sales tax compliance is notoriously complicated for many businesses, particularly those that sell more than one product and collect in more than one tax jurisdiction. As accounting professionals well know, keeping track of inconstant rates, rules and regulations is taxing. An unhealthy dose of stress is added whenever there is confusion over what triggers a sales and use tax obligation. And there is almost always some degree of confusion.
Nexus has long been defined as the physical connection between a taxing authority and a business that triggers a sales and use tax collection obligation. Yet in recent years, many states have stretched the definition of nexus to include less concrete connections. In other words, businesses don’t always have to be physically present in a state to create a tax obligation.
More than 20 states have enacted click-through or affiliate nexus laws, which base nexus on the relationship between an out-of-state retailer and in-state referrals. These include the following:
- New York
- West Virginia
Similar legislation is under consideration in at least four additional states: Nevada, South Carolina, Tennessee, and Washington; and expanding nexus is a topic of conversation in still others. While this may be good for state sales tax revenue, it creates a sales and use tax compliance nightmare; since states are independent-minded, every remote sales tax law is different.
Knowing what triggers nexus where will enable you to guide your clients unscathed through the treacherous path to remote sales tax compliance. Read on for a list of three top nexus triggers, and a solution.
Affiliate and click-through nexus
Three of the most populous states in the country have enacted affiliate or click-through nexus laws. Businesses looking to grow will undoubtedly be impacted by at least one of them.
In New York, the definition of a sales tax vendor includes, "under certain conditions, out-of-state sellers (remote affiliates) of taxable tangible personal property or services that are affiliated with businesses in New York (New York affiliates)." A seller is also presumed to be a New York vendor "if the seller enters into agreements with residents of this state to refer customers to the seller," as on a website.
In California, out-of-state retailers have to collect California sales tax if affiliate agreements referred more than $10,000 in sales of tangible personal property to California purchasers and the retailer made more than $1,000,000 in total sales of tangible personal property to California purchasers in the preceding 12 months. Nexus can also be triggered when affiliates solicit business in a variety of ways, including mail and email campaigns.
Illinois now considers out-of-state retailers to have nexus when a person located in Illinois provides to a retailer’s potential customers "a promotional code or other mechanisms that allows the retailer to track purchases referred by such persons," and the retailer receives at least $10,000 in sales from referred customers during the four preceding calendar quarters. Examples include a link on an Internet website, and promotional codes delivered by mail, hand or broadcast media.
Allow your clients to grow with grace by helping them negotiate state affiliate and click-through nexus laws.
Retailers that rely on drop shipping to fulfill orders can save time, money and headaches by not keeping inventory in stock. Yet they can also unwittingly trigger sales tax liability in other states.
Application of sales and use tax depends on the location of everyone involved in the transaction: the purchaser, the end user, the retailer and the drop shipper. Remote sellers may be held liable for sales tax when a drop shipper delivers goods on their behalf, even if they don’t have nexus in the state. In Florida, for example, "If the purchaser is an unregistered dealer located outside the state, but its customer is located within Florida… the manufacturer is required to collect sales tax from the out-of-state dealer, who, being unregistered, is unable to furnish a resale certificate." Drop shipments typically involve resale certificates, and certificate management comes with its own compliance pitfalls.
To add to the confusion, the amount subject to tax isn’t always the same. Certain states subject the wholesale price to sales tax, while others tax the retail price. And in California, sales tax is applied to either the full retail price or the wholesale price plus 10%.
Help your clients navigate complex state drop shipping laws so they won’t be surprised by unforeseen sales and use tax liability.
Remote and/or traveling employees
The Internet has freed many employees from the traditional 9-5 workday, book-ended with a commute. An increasing number of people work remotely these days, commuting from their kitchen to the back office, barefoot, in two minutes or less. Telecommuting allows many to work longer, more productive hours while also spending more time with family. It can also trigger nexus.
If an employee can live and work across town, he or she can also live and work in another state. Businesses that allow this sort of flexibility need to know that a remote workforce – or even one remote employee – can trigger nexus and a sales tax collection obligation in a state where previously there was none.
Provide your clients with an overview of state sales tax laws, highlighting states with broad definitions of nexus and those considering changing state policies.
The solution to nexus confusion
The first step to helping clients understand nexus is to know where they owe. Share this link to Avalara’s nexus hub to get them started. Once you’ve identified all activities that could trigger a tax obligation, you’ll be better able to help your clients comply with these obligations. To simplify tax compliance in all states where they owe, advise clients to switch from a manual process of managing sales and use tax to an automated solution like AvaTax.
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