Sales Tax Scaries 4: Nexus and Taxability

When Sales Tax Creeps Up on You

Ever notice how the first characters in every horror movie never realize they’re in danger until it’s too late? 

Not to sensationalize the point, but sales tax can lurk around the corners, too – especially as companies lose their heads expanding product lines and operations. These milestones are happy ones for a company, to be sure, but they might also put some bats in nexus calculations. 

What Is Nexus in Sales Tax?

Nexus is the connection your online business has with a tax jurisdiction. It can be physical in the form of offices in a state or other tax jurisdiction (to name just one condition). Nexus can also be economic when a company has enough sales in a period in a state. (We recommend that companies with $100,000 in revenue in a state during a 12-month period or 200 separate transactions in annual sales start examining whether they have economic nexus in that state.) 

According to a recent TaxConnex market survey of 100 top finance professionals, economic nexus remains a big area of anxiety. Almost four out of five of those surveyed expect to expand operations that could potentially create economic nexus – yet almost half of respondents report being confused by the taxability of their own products or services and say it’s hard to keep up with states’ changing nexus rules. 

How to Determine Your Nexus Footprint

Understanding rules associated with economic nexus is a good first step. There are only two aspects of business activities used to assess whether businesses have economic nexus in a state: taxable revenue and, still in most states, the number of transactions (if you operate a subscription model, note that every renewal counts as a transaction). 

By looking at where you have customers, you can narrow down the areas in which you need to evaluate sales and transaction thresholds. Also understand the thresholds and particulars for the states in which you have customers. And of course, even if a company doesn’t yet meet the threshold in a state for economic nexus, business growth can change that at any time.

Questions to Assess Sales Tax Nexus Risk

Another way to assess nexus exposure is to question clients: 

• Have you grown your business by selling to customers in new states? What’s the process to generate revenue in those new states – salespeople, contractors, installations? What else? 
  
  
• Have you added employees in states where you previously had none? 
  
  
• Have you established any significant vendor relationships relative to expanding your reach into more states? 
  
  
• Did you launch any new products or services during the year?
  
  
• Do you have any outstanding inquiries from states regarding your business activities or sales tax specifically? Do any of these inquiries include state tax audits? 

Understanding the Taxability of Software and Digital Goods

Generally, tangible personal property is taxable unless stated otherwise. A sales tax exemption certificate does alleviate a company from collecting and remitting sales tax on certain products and services. Services are also generally not taxable, but this is changing in a number of states. 

Taxability becomes confusing with software, which tends to have varying tax rules from state to state. Some of the questions that are relevant when determining whether sales tax applies in a certain state are: 

• Is the software SaaS-based?
  
  
• How is it delivered?
  
  
• Are maintenance or support services included with the software
  
  
• Is the maintenance or support optional or mandatory? 

The Complexity of Telecommunications Sales Tax

Similarly, taxability is confusing for a service like telecommunications services, one of the most taxed and regulated industries and that can be subject to both sales and communications taxes. 

Digital products are usually considered “intangible” and sent to your customers electronically: digital books, music, internet TV and streaming media, webinars, subscriptions, and apps, among many other products. Slightly more than half the states now tax sales of digital products. Some states have no definition of “digital” products or goods. Others use the Streamlined Sales Tax definition from the Streamlined Sales Tax Governing Board. Still, other states have their own definitions and conditions of the taxability of digital products. Scary and confusing to say the least. 

Where Telecom Providers Have Nexus

And where does a telecommunications service provider have nexus? States tend to take the position that wherever a telecom provider has clients, they have nexus. This is a result of “attributional nexus,” which gives a telecom provider a physical presence by virtue of leveraging the infrastructure within a state including switches, fiber, towers, and so on, even if the telecom provider does not own this infrastructure. (Most telecom companies don’t realize this.)  

That’s sure a lot of corners for the sales tax monster to leap out from. 

Avoid the Sales Tax Nightmare with TaxConnex

By outsourcing your compliance to a sales tax expert like TaxConnex, you can eliminate the burden of managing this on your own. Contact TaxConnex to learn more about our services.