Imagine you are having a perfectly good day – all lines of your manufacturing facilities are running smoothly, your plant expansion is almost complete and under budget, plus it’s Friday. Everything is going well until you open the mail and you have received THE DREADED NEXUS QUESTIONNAIRE!
Is this the ruin of an otherwise great day or do you chuckle and casually add it to your “to do” list, knowing that your nexus obligations are well managed.
Welcome to a four-part series about sales tax nexus - specific to manufacturers. Over the next several weeks we will explore common nexus-creating activities that can quickly become costly headaches for the unwary.
In Part One of the series, we will explore how activities beyond your four walls may be creating nexus for your company. Part Two delves into the concepts of sales agents as hidden gotcha’s. Part Three will explore how nexus can be created by where you have inventory. Finally, Part Four provides best practices to help manage the nexus process and steps to take if you discover you are non-compliant.
Most manufacturers are well aware that they have nexus where their headquarters and plants are located. But, is it really that simple? Unfortunately, the answer is no. There are many activities beyond a plant’s four walls that can be nexus-triggering events:
Remote or "Virtual" Employees: Do you have employees working remotely? Telecommuting is a popular work option for many companies. In most cases, it is good for business; however, it does open up additional sales tax compliance obligations that easily go unnoticed even to the savviest Tax Manager. Unfortunately, it often doesn’t escape the radar of the Department of Revenue, especially when they cross match payroll records with sales tax records.
Delivery and/or Shipping: Another nexus-creating activity to consider is how you are delivering products into a state. If you ship your products to your customers via common carrier, you are in the clear. If you deliver your products on your own trucks, you are creating nexus. Even if you have been delivering with your own trucks for years with no repercussions, be careful! Today, DORs are finding new ways to get information about which company trucks are using their highways to delivery products.
On-Site Installation or Services: As a manufacturer, do your employees go on-site to customer locations to perform installation, maintenance or repair services? Traveling on-site to perform these services could create nexus obligations. States often have a threshold for the number of visits into a state, but if this is a regular course of business, you will likely always cross that threshold where nexus is created.
Salespeople: Salespeople are often the impetus to creating nexus obligations. Traveling to client locations and visiting potential customers may create nexus. And, shockingly, attending trade shows often creates nexus as well. Before signing up for a trade show, consider the nexus obligations that may be created. With regard to sales & marketing activities, the acceptable maximum level of activity varies among the states. A few factors that states consider include the number of visits to the state each year and if orders are taken while in the state.
Manufacturers of all types engage in a number of business practices outside the four walls of the plant that could give rise to nexus obligation. These activities should be analyzed on a regular basis to ensure that your company remains in good sales tax compliance.
In Part 2 of "Nexus for Manufacturers", we’ll explore how Sales Agents can create nexus obligations.
What’s the most creative way a state has charged your company with nexus violations? Which states do you think have the strictest nexus standards?
Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:
- Manufacturing Exemption Misconception: Everything is Tax Exempt!
- Manufacturers’ Utility Studies: 5 Approaches to Utility Exemptions
- Manufacturing Sales & Use Exemptions: Open to Interpretation
- Use Tax Exemptions Case: Non-Traditional Manufacturer in Missouri
- Manufacturing Sales Tax Exemptions: Are Suppliers Entitled to Them?