As a sales tax professional with over 30 years’ experience in the field, I get asked a lot of questions about sales tax. And many of the people who ask are other advisers – accountants, bookkeepers, and attorneys. This isn’t a subject a generalist is always comfortable addressing.
Over the years I’ve noticed that some questions pop up far more frequently than others. The one I get asked more than any other, however, is whether or not someone has sales tax nexus in a state. Even if you’re a novice to sales tax, you may understand that having nexus in a state means that you need to collect and remit sales tax in that state. Which makes nexus a big deal.
Nexus is inherently confusing for many people since every state treats it differently. On top of that, many states are now enacting new types of nexus legislation, along with regulations pertaining to out-of-state sellers. These types of legislation – click-through, affiliate, economic, and marketplace nexus – introduce even more ways in which taxpayers can create nexus in a state.
This leaves those of us who have clients that look to us for advice with the responsibility of figuring out just where they have nexus. The issues that can arise if you have nexus in a state and aren’t collecting and remitting sales tax can be very serious – audits, anyone? With that in mind, I want to show you what you can do to find out if your clients have created sales tax nexus in a state. Then I’ll tell you about some of the corrective actions you can take if you find out that nexus has been created and the taxpayer isn’t registered in the state.
Nexus Study – The Key to Determining Where Nexus Has Been Created
In order to determine your client’s level of risk for sales tax nexus, a nexus study needs to be conducted. This is the tool used to evaluate the activities being conducted within different taxing jurisdictions. Some of the questions we ask the client during a nexus study are:
- Where is there a permanent place of business – warehouse, sales office, manufacturing plant, leased property at customer locations?
- Where is there a temporary place of business – trade show booths, sales meetings, training sites, movable equipment at work sites?
- Where are there individuals permanently operating – employee salespeople, manufacturer representatives, service people, agents, and related company activities?
- Where are individuals temporarily operating – traveling salespeople, traveling manufacturer representatives, traveling sales people, owned delivery vehicles, agents, and affiliates?
When pulling together the answers to these questions, also determine the level of the activity – how often and long are the visits to a state, and what activity is being performed? You’ll also need to determine the economic impact in order to quantify the risk. For example, what is the dollar value of the average sale? What is the total dollar amount of all sales into the jurisdiction since the activities began? These are just a few of the questions you should be asking. You also need to evaluate the risk of being discovered by the state – how visible are the activities conducted in the state, and who are the customers?
Big picture, the three steps of a nexus study are as follows:
- Do you have nexus in the state?
- Are you making taxable sales in the state?
- Are you making exempt sales, and – if so – do you have exemption certificates from those customers?
So, let’s say you’ve completed a nexus study and have found out that your client has created sales tax nexus in a number of states in which they aren’t registered to collect and remit sales tax. What do you do now?
Corrective Actions if Your Client Has Created Nexus and Isn’t Registered
If you discover that your client has created sales tax nexus in a state and isn’t registered, know that you do have some options at your disposal. But first, you should understand where your client stands in this situation. Establishment of nexus in a jurisdiction requires the collection of sales or use tax by retailers on sales of taxable property and services within that jurisdiction. In most jurisdictions, there is no statute of limitations if the taxpayer has not filed the required returns. If nexus was just established, you should evaluate options immediately.
If the nexus was established in the past, an evaluation of options should occur. At a minimum, all exemption certificates should be obtained in order to minimize potential liability. Many jurisdictions offer a voluntary disclosure program whereby a business that approaches them before being contacted can enter into an agreement. This agreement usually limits the number of years that the jurisdiction will go back (usually their normal statute of limitation for registered businesses). In addition, penalty and interest concessions may be included.
States also occasionally offer amnesty programs to encourage businesses to register. If a business can take advantage of registering under an amnesty program, it generally should do so. Most jurisdictions impose harsher penalties after an amnesty program for businesses that are discovered.
If you determine that taxable transactions have been made, contact the customers to determine whether they have paid the use tax directly to the jurisdiction or have been audited by the jurisdiction. Most taxing authorities will accept statements from your customers certifying that the tax has been paid in one of these ways. Also note that it is illegal to collect sales tax before registration. Since sales and use taxes are considered trust taxes, criminal penalties could apply.
If you’d like to learn more about sales tax nexus, I encourage you to download my FREE nexus whitepaper – 5 Things to Understand About Your Nexus Footprint. And if you’re attending the 2016 Accountex Conference, make sure to check out my session: Sales Tax Nexus. I’m also teaching a pre conference workshop: Sales Tax Basics for CPAs. I hope to see you there!