We’ve been conducting Lunch and Learns throughout the country over the last several months focused on sales tax nexus issues. We were last in Boston and we’re planning an event for the San Francisco – San Jose area right now. (BTW, if you have suggestions for a location and venue in the Bay-area please let me know.) We generally start with a basic overview of why sales tax nexus is important. I usually describe to the audience that without sales tax nexus a state has no ability to subject you to their sales tax rules. (At least that’s how things are now until further notice…..pay attention to the Marketplace Fairness Act.)
From there we discuss a more clinical definition of sales tax nexus citing the National Bellas Hess and Quill cases as the standards by which we live by today. We then turn to the discussion of what creates sales tax nexus. This is always interesting. Most people are aware of the typical sales tax nexus creating activities like physical offices, employees, and inventory. However, there are more subtle issues like Amazon laws, click-through nexus, traveling sales reps, attending trade shows, and engaging third parties to sell or perform services on one’s behalf. Here’s a link to our nexus questionnaire and our video series on Youtube that discusses sales tax nexus.
As we talk through these different activities, we usually get a question something like this, “Exactly how many days of these activities create sales tax nexus for me?” Herein lays the $64,000 question. Unfortunately, most states have left this to interpretation by using language like “substantial physical presence”. What is substantial? Is it 1 day (like Michigan may claim) or is it 10 days? Or more? This is one aspect of the “art” of sales tax compliance. The answers are rarely black and white. There’s typically some level of risk analysis to determine what you should do. Ultimately, I believe sales tax compliance is a balancing act of cost and risk. You need to make a risk assessment of the likelihood that your activities are creating sales tax nexus in a particular state. From there, you may need to look at your revenue in that state to determine the materiality of your risk. Also understanding the taxability of your products/services and the potentially tax exempt nature of your customers (schools, government institutions, non-profits, etc.) is helpful. Be careful though because not all schools, government institutions, and non-profits will be tax exempt in every state. Here’s a great guide for assessing your compliance risk – 5 Steps to Sales Tax Compliance.
As you can see, the analysis of how to maintain sales tax compliance has a number of moving parts. Stay tuned for additional Lunch & Learns as we continue to roll these out to a city near you. They’re a great opportunity to learn some important concepts and network with other professionals that are experiencing the same struggles as you might be. In the interim, if you have questions, reach out to a sales tax professional that can help develop the appropriate compliance process.