As my first contribution to the SALES TAX NEXUS blog, I thought I would start with some basic sales tax nexus concepts. I don’t plan to provide an in-depth legal analysis of these concepts but rather a more practical, business perspective.
First of all, sales tax nexus is the basis for all sales tax discussions. Without sales tax nexus, a business has no further concern from a sales tax perspective. In this context, in its simplest definition, nexus is a physical connection between a state and a business that enables a state to subject that business to its sales tax laws. The connection has to be “substantial” and that’s where the problem arises. “Substantial” is generally left to interpretation and is rarely clearly defined.
There are a few unique situations where the rules are black and white. For example, Michigan references two days of solicitation over a twelve month period as substantial enough for them to apply their sales tax laws to a business. Other states, like California, have specific statutes outlined for trade show activity. In the case of California, it’s 16 days of trade show attendance/exhibition before a business reaches the sales tax nexus threshold (so long as you have less than $100,000 in sales attributed to the trade show activities).
A common mistake made in defining whether a business has substantial presence or not for sale tax purposes is the application of income tax nexus rules to sales tax nexus. The rules are somewhat different. Sales tax nexus can exist without income tax nexus but not vice versa. The threshold for sales tax nexus is lower than that of income tax nexus. A key contributor to sales tax nexus is the act of solicitation. The Michigan and California examples above relate to solicitation. As another example, solicitation could be in the form of a Georgia based/resident sales rep for a North Carolina based company who travels into Florida in the pursuit of new sales. Depending on the frequency and duration of the visits to Florida, these activities could trigger Florida sales tax nexus for the North Carolina based company even in the absence of any other connection to Florida. These simple solicitation activities are not likely to meet the income tax nexus threshold but, depending on the state and frequency will likely lead to sales tax nexus.
A business is best advised to clearly understand their sales tax nexus footprint and what activities could cause that footprint to expand in the future. Due to the interpretative nature of sales tax nexus, it’s often advisable for a small or mid-sized business to seek professional advice. With a firm grasp on sales tax nexus, a business can then determine their compliance strategies in terms of collecting and remitting sales tax.
In future blog entries, I’ll take a closer look at some of the sales tax nexus related laws that are currently being debated including click-through and affiliate nexus – both of which have application to e-commerce transactions.
Other recent “Sales Tax Nexus” posts by Jeff Meigs:
- Click-Through Nexus & The Law of Unintended Consequences
- Nexus: The Basis For All Sales Tax Discussions