How nexus trips you up
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The document discusses the concept of nexus in sales tax and its importance for businesses. It defines nexus as a substantial physical presence that creates the requirement to collect and remit sales tax. It explains that states define nexus-creating activities and have passed "Amazon laws" to expand the definition of nexus to include online relationships. The document warns that ignoring nexus can lead to consequences like fines, penalties, and extended statutes of limitations. It provides tips for businesses to avoid getting tripped up by nexus requirements like conducting a nexus study and understanding state statutes.
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How nexus trips you up
- 2. How Nexus Trips You Up Shane Ratigan, JD, LLM Compliance Manager Shane.ratigan@avalara.com 206.826.4900 January 22, 2013 © Avalara 2
- 3. Introduction Shane Ratigan, JD LLM (Taxation) Shane began his career as a self-employed business owner. After 10 years in the motorcycle business, he returned to college to gain a Bachelor's in accounting and a Bachelor's in Business Adminstration. He went on to earn his Juris Doctorate at Syracuse University of College of Law in New York and his LLM Master's of Taxation at the University of Washington in Seattle. Shane has spent several years counseling small business owners on tax and succession planning. He is a licensed attorney in Oregon and Washington. Shane currently works in sales tax law and sales tax compliance with Avalara. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 3
- 4. About Avalara We’re a team of developers, accountants, support specialists, marketers, salespeople, researchers, and technologists who know we’re onto something big. We know that we are part of a team that is revolutionizing what is a huge drain for businesses big and small. Managing the compliance of transactional taxes, from sales and use tax to 1099s and more. Making sales tax less taxing 4
- 5. What lies outside your field of vision? Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 5
- 6. In this webinar, we’ll talk about… • • • • What is nexus, and why is it important? Who defines nexus? “Types” of nexus What can happen to your business if you’re tripped up by nexus? • The Marketplace Fairness Act…will it help or hurt? • What should you do? • Resources to help Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 6
- 7. What is nexus? A “substantial physical presence” which creates the requirement to collect and remit sales tax.* *Quill v. North Dakota (1992) Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 7
- 8. Why does nexus matter? Sales Tax and State Budgets Sales taxes make up the biggest chunk of state revenues. Source: US Census Bureau, 2012 Census of Governments: Finance – Survey of State Government Tax Collections at www.census.gov/govs/statetax Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 8
- 9. Who defines nexus? • States do. • Nexus creating activities – – – – – – – – Traveling Salespeople Agents or Distributors Employees on Payroll Training Trade Show Attendance Drop Shippers / Warehousing Servicing Tangible Personal Property Affiliates Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 9
- 10. “Amazon” Laws • Have expanded definitions of nexus to include onlinespecific relationships such as affiliate and web advertising. • Typically contain one or more of the following elements: – Affiliate and related entity – Click-through – Consumer use notification Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 10
- 11. Affiliate and related entity nexus • A relationship between an out-of-state seller and its instate affiliate that triggers a nexus obligation • California. Out-of-state retailers must collect sales tax if they are related in any way to any entity located in the state. • North Carolina. Out-of-state retailers that make more than $10,000 in annual gross receipts from affiliate referrals must collect North Carolina sales tax. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 11
- 12. “Click Through” Nexus • Applies when an in-state web advertisement clicks through to a remote ecommerce portal in order to complete a sale. • New York. Web advertisements that promote in-state sales trigger nexus. • Connecticut. Online retailers that use affiliates to advertise within the state that result in direct sales to an out-of-state ecommerce portal. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 12
- 13. Consumer Use Notification • Consumer use tax – paid by the consumer on tangible items for which sales tax was not charged. – Some Amazon laws include a consumer use tax notification component • Oklahoma. Must notify Oklahoma purchasers that use tax is due on nonexempt items. • Tennessee. Amazon has sent an email reminder to customers in Tennessee reminding them to pay use tax on their purchases. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 13
- 14. What aren’t you thinking about? • Do you know everywhere you have nexus today? • How and where will your business grow? • New partnerships, acquisitions, distribution models • Industries or offerings that create nexus Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 14
- 15. Consequences of ignoring nexus • Extended statute of limitations – often 6+ years (or forever) instead of 3 or 4 years • Unrecovered tax reimbursement – the company cannot easily recover the tax from its customers after-the-fact • Unrecorded liability for financial statement purposes – causing pain when the liability is exposed • M& A – say a purchase of the company – and due diligence discovers the unrecorded liability, then a reserve against the purchase price may be required to offset the unrecorded liability • Fines, penalties, and interest Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 15
- 16. Widening the nexus net Marketplace Fairness Act information: www.salestaxchanges.com Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 16
- 17. What should you do? 10 Tips to keep you from getting tripped up by nexus You should: Make sure you: 1. 2. 3. 4. 6. Understand activities that can trigger nexus 7. Keep comprehensive sales records 8. Read up on SST 9. Err on the side of caution 10. Automate with technology Do a nexus study Report consumers’ use tax Understand state statutes Be compliant from the beginning, and always 5. Know your filing requirements More resources available at: www.avalara.com/resources Making sales tax less taxing 17
- 18. End-to-End Compliance Making sales tax less taxing
- 19. Avalara Resources: Learn More 140 characters of sales tax wisdom Testimonials, demos, humor and more Insight from expert contributors twitter.com/avalara youtube.com/avalara1 blog.avalara.com And don’t forget to like us on Facebook! Making sales tax less taxing 19
Notas do Editor
- You’ve been working hard to ensure that you’re doing sales tax right. You spend countless hours looking up rates, rules, boundaries…you pay attention to things like whether what you sell is taxable in the states in which you sell. You do your best to remit on time and to manage your exempt customers. You do all of it…in the states in which you believe you are required to do so. The others? Well, fortunately, you think, you don’t have to worry about those states. Yeah, you may sell occasionally to some customers in those other states, but you don’t have a physical presence there, you don’t use drop shippers or have a warehouse…so you’re safe, right? You believe that you have sales tax handled, right? You very well might. And yet the compliance challenges just beyond your field of vision are the very issues that can trip up even the most knowledgeable sales tax professional. And the first, the basis for all of the others, is nexus.
- Historically, the definition of nexus has been grounded (pardon the pun) in the idea of physical presence. Sellers have been considered to have nexus in a state if they have a “substantial physical presence” in that state. This concept is critically important to the whole landscape of sales tax compliance, because it speaks to whether a state has a right, under the US Constitution, to subject you to its laws. For those of you geeky enough to care, the Due Process and Commerce clauses have been held up by the courts, over many years, as presenting the relevant conceptual framework in deciding cases like Quill v. North Dakota. The crux of the court’s decision in Quill was that, in their words, “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” The effect of Quill, in the absence of congressional action since the decision, is that the states have defined what it means to have nexus, and some of those definitions have been very creative, indeed!
- Why does nexus matter? Willie Sutton was asked once why he robbed banks, and he supposedly said “Because that’s where the money is!” As you can see from this chart from the US Census Bureau, general sales taxes provide nearly a third, on average, of a state’s budget, second only to individual income taxes. If you add in selective sales and gross receipts taxes, which include things like motor fuel sales, alcoholic beverage sales, insurance premium sales, tobacco product sales, and amusement sales, the total collection of sales taxes comprises nearly half of the average state’s budget!Sales taxes are not new taxes…they have existed almost as long as man has walked the earth. But, as technology has advanced, enabling you to sell your goods and services literally anywhere on the planet, the ability and authority for states to require you to collect and remit sales taxes has grown increasingly complex. With US states facing a collective $55 billion budget shortfall, they are looking for any and every way to bring more money into state coffers, and uncollected sales tax is a fertile field begging to be harvested. Some estimates put the amount of uncollected sales taxes at as much as $23 billion, or nearly half of the budget shortfall. Do you think that that makes it an attractive target for states? Of course it does! And the first thing that a state needs to do in order to go after those revenues is to meet the legal and constitutional bar that allows them to subject you to their laws, and that is all about nexus.
- So who defines what nexus means? Remember Quill? The Supreme Court left it to Congress, while allowing states some pretty broad latitude in the absence of congressional action. As you can see from this list, “substantial physical presence” is no longer the single defining factor in determining whether or not you have nexus in a state. And nearly every one of the things on this list has been challenged at one point or other, and stood up to legal scrutiny. In cases like Scripto v. Carson and Tyler Pipe v. Washington Department of Revenue, the courts broadened the definition beyond a substantial physical presence to include things like activities performed on behalf of a taxpayer which are significantly associated with the taxpayer’s ability to establish and maintain a market in that state. So, if you have independent sales people in a state, because you need them to establish and maintain a market there, well, then, you have nexus in that state.
- An affiliate is usually considered an entity within a state with activities directly benefitting an out-of-state seller. Many state laws designate what kinds of affiliate relationships trigger sales tax collection obligations on remote sellers, so tracking each state is a good idea. California. Out-of-state retailers must collect sales tax if they are related in any way to any entity located in the state. This includes entities that conduct business on the out-of-state seller’s behalf, as well as entities that use a similar patent or the same trademark. California considers affiliate nexus to apply even if the related business operations are utterly separate from the retail operation in another state.North Carolina. Out-of-state retailers that make more than $10,000 in annual gross receipts from affiliate referrals must collect North Carolina sales tax.
- New York. Web advertisements that promote in-state sales trigger nexus. The law was effectively upheld by SCOTUS’s refusal to hear an appeal of the law by Amazon and Overstock.com.Connecticut. Online retailers that use affiliates to advertise within the state, that result in direct sales to an out-of-state ecommerce portal, are required to collect sales tax from customers. Some states that are currently proposing broader nexus provisions that will likely go into effect in 2013.
- Some Amazon laws also include a consumer use tax notification component, which requires vendors to notify consumers of their use tax obligations and/or to report in-state sales to revenue authorities. Consumer use tax is a tax paid by the consumer on tangible items, for which they were not required to pay sales tax by out-of-state retailers. Consumer use tax is intended to offset sales tax revenue not collected by multi-state businesses. Very few consumers ever actually pay consumer use tax, but that is likely going to change soon.Oklahoma. Out-of-state retailers that do not collect sales and use tax—and that made more than $10,000 in gross receipts in Oklahoma the previous year, must notify Oklahoma purchasers that use tax is due on nonexempt items. Tennessee. For the second year in a row, Amazon has sent a friendly email reminder to its customers in Tennessee, reminding them to pay use tax on their purchases.
- Finding out that your business has nexus in states you didn’t realize can have a damaging effect on your business. For starters, you could be audited
- If it becomes law, the Marketplace Fairness Act of 2013 would allow states that adhere to sales tax simplification rules to require multi-state online retailers to collect sales tax. In other words, the nexus net is growing larger. The bill as written would give states the authority to collect sales tax from remote sellers, if they sign the Streamlined Sales Tax Agreement (SST) or if they implement a number of sales tax administration simplifications. The Streamlined Sales Tax Agreement (SST), currently signed by 22 states, works to simplify and create uniformity in sales tax administration rules. States adhering to the Streamlined Sales Tax Agreement follow guidelines intended to ease the burden of sales tax collection and remittance for multi-state businesses. These guidelines include: Uniform definitions within tax laws.Rate simplification.Uniform-sourcing rules.Simplified exemption administration.
- Do a nexus study! The first, most important thing you need to understand is whether or not you have a sales tax obligation, and where. If you’re using affiliates, or have click-through relationships, or use independent agents in a state, you most likely have nexus there! Doing a nexus study can help you identify where you have nexus, and you’re likely to discover that you have nexus in places where you didn’t believe that you did.Report consumers’ use tax. Even though the obligation is on the consumer to pay use tax, in an increasing number of states, you may be required to remind the consumer of their obligation.Understand state rules. As with everything else about sales tax, there is huge variability from state to state regarding nexus, and it is up to you to understand what your obligations are in those states where you do business.Be compliant. Well, this one kinda goes without saying, but the safest thing that you can do is to be compliant always. Know what you are required to do, and do it!Know your filing requirements. Understand nexus-creating activities. In addition to things like affiliates and click-through relationships, know in which states other activities, like training or trade-show attendance can create nexus for you.Keep comprehensive sales records.Read up on SST.The Streamlined Sales Tax Agreement (SST), currently signed by 22 states, works to simplify and create uniformity in sales tax administration rules. The MFA, as written, would give states the authority to collect sales tax from remote sellers, if they sign the Streamlined Sales Tax Agreement (SST) or if they implement a number of sales tax administration simplifications. Err on the side of caution. After you’ve done a nexus study, don’t be complacent. As your business grows, your nexus footprint will grow, as well. New partnerships, acquisitions, new distribution models – all of these can change where you have nexus.Automate! The easiest, least error-prone way to ensure that you have all of your bases covered is to automate. Technology can keep track of requirements, filing, reports, certificate management, calculation…far, far better than you will be able to do manually. Combine with a nexus study, and you stand the best chance of not being tripped up.