It seems as if everyone is looking for a simple answer or an easy fix these days. Determining sales tax nexus is no different. Understanding the general concept is quite simple but applying it to your unique situation is where the difficulty arises. The reality is that there’s rarely a clear-cut answer. Sales tax nexus always works in shades of gray. Sure, having an office in a state will give you sales tax nexus in the state. But what about a sales rep that travels into the state? What about having a subcontractor install or repair a piece of equipment for one of your customers. These are all variables that should be factored in when reviewing sales tax nexus.
Even if you’ve determined you have sales tax nexus, should you register? (I hope no auditors are reading this because the answer can be no.) Registering for sales tax purposes is often a business risk decision. If you have minimal sales tax liability, then the cost of compliance may outweigh the risk and cost of getting identified and paying a penalty under audit.
If you do decide to register there’s that pesky problem on most sales tax registration forms that asks when you first started doing business in the state. Answer truthfully and you may subject yourself to prior period exposure and additional tax liability, penalties, and interest. Answer not so truthfully and you could subject yourself to perjury. I’ve never seen a state prosecute anyone for this type of issue but they likely will not be so forgiving of penalties if they identify this issue under audit.
Sorry…there’s no easy fix here. Educating yourself on what constitutes nexus is the first step. Reviewing your business activities in each suspect state is a good second step. From there, you should review your prior revenue in each state and based on when sales tax nexus was first created, estimate your potential prior period exposure. A quick way to get a directionally accurate number is to apply a general tax rate of 9% and add an additional 10% for penalty. This will not be 100% accurate but will tell you where you should be concerned. From there, you will be in a position to make the appropriate business risk decision….register and file prospectively, enter into a voluntary disclosure agreement, do nothing, or perhaps you seek expert guidance.
If you have questions, call us or look at TaxConnex Sales Tax Consulting for more info.