One of the most startling revelations a CEO, Controller or Tax Manager will make is discovering the company has established sales tax nexus in states but is not registered with those states. The oversight can often be a huge source of sales tax liability. This four-part sales tax nexus series will help you avoid these risks by providing a better understanding of what creates nexus as well as tips to proactively manage nexus compliance.
Part One of the series focused on employee activities beyond the plant’s four walls that create nexus. Now in Part Two we will explore nexus-creating activities by persons, mostly sales agents, who do not work for the company.
Many companies are turning to independent contractors or sales agents to sell their company’s products and services. This choice saves on payroll and insurance. Is it also a loop-hole to avoid sales tax collection responsibilities in another state?
Unfortunately, the answer is often no. In most states, employing an agent to represent your company to solicit sales on your behalf is a nexus-creating activity.
There have been many precedent-setting cases focusing on the concept of nexus, but the U.S. Supreme Court case of Scripto v Carson (362, U.S. 207, 1960) best exemplifies the concept of sales agents creating nexus. In this case, the Supreme Court had to decide whether a Georgia retailer with no offices in Florida could be required to collect tax on sales made in Florida by wholesale brokers of Scripto who were paid on commission. The Supreme Court decided that the neither the Commerce Clause of the Constitution (which prevented a burden on interstate commerce) nor the Due Process Clause of the Fourteenth Amendment(which states equal protection of the laws) was violated. The Court ruled that retailers could be physically present in a state through those acting on their behalf (i.e. sales agents). The Court held that the difference between regular employees and independent contractors was “without constitutional significance.” Permitting such distinctions would open up the states to a flood of tax avoidance techniques.
Although that case was decided more than 50 years ago, it has withstood the test of time and has been used as precedent in numerous other cases focusing on sales tax nexus.
So what does this mean for the average manufacturer? Companies need to investigate sales activities very carefully. Look beyond the activities of employees and peer outside the plant’s four walls.
As nexus requirements continue to become more stringent and states step up their enforcement techniques, it is imperative to look at all nexus-creating activities on a regular basis to locate red flags and address potential liabilities for your company.
Has your company encountered nexus problems because of sales agents?What do you think are other sales techniques that trigger nexus red flags?
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?