What is nexus tax

Generally, audit firms place a higher priority on federal and state income tax liability rather than sales tax. In a post - Wayfair world this needs to change, and taxpayers should be aware a potential substantial liability relates to sales tax since states are now employing an economic nexus measure. It should be reviewed quarterly in a manner similar to income tax. Further, companies should set up a reserve for potential sales tax liabilities in states where they operate. Remote sellers should also consider contingencies required to be booked related to potential liabilities stemming from exceeding nexus thresholds.

Some states are ostensibly working to make sales tax compliance and collection easier for taxpayers. Some examples include websites that allow users to manually calculate sales tax based on address, or an application programming interface e. A majority of states now have such a lookup tool in one form or another. Arkansas has a tool for searching by ZIP code or address.

Washington state's lookup tool incorporates a state map, allows searching by geographical coordinates, and calculates the tax for any given taxable amount of sale. Colorado's site incorporates a clickable map and provides a breakdown of tax rate components. Further, states such as Colorado and Alaska are working on unifying sales tax collection for local jurisdictions with administrations, rules, and reporting requirements independent from those of the state government.

Arizona has already unified all local filing on the state return to reduce the complexity of compliance, although the Form TPT - 2 , Transaction Privilege, Use and Severance Tax Return , is far from simple to complete. Also, a handful of states, such as Alabama and Texas, have provided a unified state and local rate for internet sellers to provide greater ease of compliance.

Other options offered by states to reduce penalties associated with noncompliance include voluntary disclosure programs. Be forewarned, though, that sellers are not automatically eligible for these programs. Sellers who believe they qualify for a voluntary disclosure program will need to seek permission to participate. On the other hand, some states are taking an aggressive approach in seeking out taxpayers for compliance with the new nexus rules.

For example, the author has seen in practice DORs sending out more nexus questionnaires to various companies to, for all intents and purposes, scare them into compliance.

Companies should take great care in responding to these questionnaires because states can use this information to force reporting for sales tax and other areas of taxation. To find targets, state auditors have been known to visit an e - commerce site and place an order to see if the seller charges sales tax. If no tax is charged, a questionnaire is then mailed to the seller.

Auditors can also check on companies that advertise heavily in their state or have achieved some level of public notoriety. States will also continue to look for sellers that may have established facilities in their state to make sales or store inventory.

A facility or in - state inventory constitutes old - school physical presence and can be the basis of an audit stretching back to well before economic nexus standards came into existence. Much of this data can be garnered from entity - level income tax returns that the taxpayer files in the state, which provide a breakout of property, payroll, and sales. As discussed above, DORs can use information in property tax records to see if an entity has real property in the state to establish nexus.

Another resource state DORs use is the purchase records of their in - state taxpayers that were obtained as part of consumer use tax audits. Do the records reveal sizable out - of - state vendors not currently charging tax? Aggregating this sort of data from many audits could generate a sizable list of targets. States receive Form - MISC data as part of the federal reporting, and it provides a wealth of seller data that they can use to identify sellers that should be collecting sales tax.

States will also look to whether a company has sponsored or participated in conferences or trade shows within their borders to determine whether a company makes sales at a level that meets the states' economic nexus threshold. Companies should be aware of and monitor their physical and economic presence nexus on a quarterly basis, using the tools and information discussed in this article.

Also, companies should defend against and challenge state assertions concerning sales tax nexus rules, as well as petition Congress for clearer and more equitable nexus guidelines, especially during these times of financial upheaval caused by COVID - If organizations decide to register to collect sales tax in a state, they should take advantage of any benefits and tools that the state is providing.

A company will be in a better position to manage its sales tax collection responsibilities for a state if it determines whether it has physical or economic nexus before it receives a notice, letter, or nexus questionnaire from the state DOR. About the author. Antonio Di Benedetto, J.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul. Wayfair , a physical presence in the state was required for sales and use tax nexus.

Post-Wayfair, the economic nexus standard, which historically applied for corporate income tax only, became the prevailing standard for sales and use tax nexus. Economic nexus looks at economic activity within a state to determine if a business has nexus.

Not a subscriber? Request a demo. On June 21, , the U. Supreme Court issued a decision in South Dakota v. Wayfair, Inc. This may cause businesses to have nexus in significantly more states than they had previously, especially for businesses making online sales of taxable tangible personal property or services.

The U. The Due Process Clause of the U. Constitution requires that there be some minimum connection between a state and the person, property, or transaction it seeks to tax.

The Commerce Clause has also been interpreted as prohibiting states from unduly burdening interstate commerce. A significant distinction between the Due Process Clause and the Commerce Clause nexus requirements is that the Commerce Clause nexus requirements may be changed by Congress. The Survey of State Tax Departments reveals insights and trends among the states on dozens of sales and use tax issues. The economic presence nexus standard looks at the levels of economic activity within a state to determine if a business activity creates nexus.

These statutes generally require out-of-state businesses to collect or pay tax in a state if they meet a specified threshold of sales made or revenue generated within the state.

Supreme Court validated economic nexus for sales tax purposes in South Dakota v. Under the economic presence nexus standard, an out-of-state corporation may trigger nexus by conducting a certain amount of economic activity within the state e. You might be wondering " what is nexus? And it is these sufficient connections with a jurisdiction municipality, state, or even another country that allows a particular jurisdiction to subject your business to their tax laws.

One of the frustrating things about nexus is that you can have nexus for one tax type and not another. See what we mean?

Taking a closer look at your business's nexus situation is beneficial in that it can help you determine if:. Simply put, understanding nexus and how it relates to your business activity can also save you a lot of time and worry! States are ramping up efforts to discover new sources of revenue and they often send out nexus questionnaires trying to find out if you have nexus.