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Many companies are confused by the concept of sales tax nexus. This nexus represents the connection between your company and the jurisdiction in question. The most straightforward method of establishing nexus is to have a physical office with employees in a jurisdiction.

Once you’ve established nexus, your company is responsible for collecting and remitting sales tax in that jurisdiction. However, this concept goes far beyond a physical office. This article will explain eight ways that you could establish business nexus and how your company can work toward complete compliance with the law when you work with TaxConnex.

Legal Background

Sales tax nexus is the concept that enables state and local governments to require businesses to collect sales tax on the products and services they sell. One of the first legal judgments governing this concept was ruled on by the U.S. Supreme Court in 1967. This decision found that the state of Illinois had no basis for requiring National Bella vs. Hess, a catalog merchant with no physical presence in the state, to collect and remit sales tax from its customers. The physical presence standard was reinforced by the U.S. Supreme Court once again in 1992 in the North Dakota vs. Quill case.

In the 2008 decision of South Dakota vs. Wayfair, a new form of nexus was confirmed – economic nexus. In this landmark decision, the U.S. Supreme Court ruled that the state of South Dakota could require businesses with no physical presence in the state to collect sales tax. In South Dakota, the threshold for establishing economic nexus is $100,000 in sales or 200 individual transactions. As a result of this decision, South Dakota is estimated to receive $38 to $48 million each year in revenues from out-of-state sellers.

Many other states have adopted similar statutes, meaning that most states can now force out-of-state businesses to collect the applicable sales and use tax. These laws generate millions of dollars each year for each state.

Methods in Which Businesses Create Nexus

While some of the methods in which businesses establish nexus seem apparent, several ways seem obscure and easy to miss. These methods can trap companies who are unaware of them. Here are eight ways companies can establish sales tax nexus and thus be required to collect sales tax for specific jurisdictions.

1. Rentals or Leases

Today’s economy has allowed rental and leasing companies to flourish. Companies rent and lease everything from camera lenses to designer clothes to heavy machinery. Many jurisdictions charge sales tax for the rental or lease of tangible personal property. One key sales tax nexus creating activity is owning property in a particular jurisdiction. Because the rental or leasing company maintains ownership of the item, they establish a physical presence when renting or leasing an item.

2. Sales Growth in New States or Jurisdictions

Economic nexus was established after the 2018 Supreme Court decision in South Dakota v Wayfair. Since the 2018 decision, the majority of the states that collect sales tax have enacted economic nexus. Economic nexus differs across states but can create a sales tax obligation for your business by the number of transactions or revenue created from sales between your business and a state or jurisdiction.

Once you’ve reached the transaction or revenue number within a state, you have created a sales tax obligation and will be responsible for collecting the applicable sales tax. 

3. Salespeople

Having a salesperson in another state or jurisdiction often means that your company will be required to collect sales tax. This is sometimes known as the “feet on the ground” requirement and is one of the criteria that establishes a physical nexus. There is a sales threshold for companies with salespeople in a few states, but these thresholds are so low that it is almost certain that one active salesperson will meet them.

4. Tradeshows or Sales Visits

While these may not have had as much impact this year, tradeshows and in-person sales visits can create physical nexus for your business. If your business regularly attends tradeshows out of state where the business’s purpose is selling or makes in-person visits out of state for sales meetings, you must research state sales tax rules in that jurisdiction.

States like Texas and Washington are aggressive in their approach toward sales tax nexus related to tradeshows. Texas requires sales tax collection after only one day’s appearance at a tradeshow or convention. Washington allows companies to participate in just one tradeshow per year before triggering nexus, but no sales can be made.

5. Independent Contractors

An independent contractor’s presence in the state is enough to trigger nexus in many states, as long as this person is making sales or providing services on your behalf. This is a provision that many companies miss, meaning that they could incur significant penalties.

For example, in California, any representative, canvasser, agent, independent contractor, or solicitor responsible for selling, installing, delivering, assembling, or taking orders for a company is subject to tax nexus.

6. Performing Services

When performing services, whether through employees or via contractors, a business may have individuals at a client site. These individuals will help establish a physical presence wherever these services are performed. It should be noted that the services may not be subject to sales tax collection, but the activity of providing services results in sales tax nexus. As previously noted, once the sales tax nexus is established, the business is responsible for collecting any applicable sales tax – on taxable items or services.

7. Deliveries

If you are using your own company’s vehicle to deliver goods in a jurisdiction, your company will likely need to collect and remit the applicable sales and use taxes. Shipping via common carrier does not establish nexus, but your vehicles/trucks that you own that enter a state will create nexus.

8. Warehouses

Warehousing is another area where tax nexus can easily be triggered. Housing inventory in another state will create sales tax nexus. Many businesses do not own the warehouse, but they own the inventory sitting in the warehouse. In this example, the inventory that is owned by the company creates nexus. Of course, if the business owns the warehouse itself, that also creates sales tax nexus. Businesses are often surprised by using a third-party logistics company that manages the inventory, order fulfillment, shipping, etc., on behalf of the business. The “owned” inventory sitting in the 3PL warehouse will create sales tax nexus.

A company’s growth should be celebrated, but as you expand your sales footprint (in both sales and operations), you should also monitor your sales tax nexus. Suppose your tax obligations are not being handled by a competent provider like TaxConnex. In that case, your company will likely have to pay penalties and incur other legal consequences due to the failure to collect and remit sales tax properly. There is no need to fall short of compliance with state and local laws. Contracting with a provider like TaxConnex can bring you important peace of mind and protect your company from legal action.

In-House or Outsourced? How are you managing sales tax compliance? 

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