Nexus is a frequent topic of conversation with my clients – especially those that are considered small or mid-market businesses. There’s a perception that sales tax nexus equals income tax nexus. This is often promulgated by CPA firms that apply income tax nexus principles to sales tax nexus. This can be troublesome in certain situations. Take this example, a sales rep travels into North Dakota three days per-year to meet with clients and new prospects. Additionally, there’s a one-day trade show where this business displays their products. Orders are never accepted in the state. In this situation, the “frequent” visitation would likely meet the sales tax nexus threshold but the fact that orders are not accepted in the state would lead me to conclude that income tax nexus does not exist. So let’s follow this through. This business’s CPA firm rightfully determines that income tax nexus does not exist. However, the same assumptions used to confirm income tax nexus, when carried through to sales tax yields an incorrect result. Now, North Dakota sends a nexus questionnaire to the business and thinking they have nothing to worry about, the business fills out the questionnaire accurately. Much to their surprise, this business receives a notification that they need to register for sales tax purposes and North Dakota is scheduling an audit to review their prior activity and assess tax, penalties, and interest. Now the business is in hot water!
What’s the lesson learned? The determination that income tax nexus exists will almost always mean that sales tax nexus exists too. (If you have an example to the contrary, I’d be interested in your opinion.) However, sales tax nexus can most certainly exist without income tax nexus.