Nexus Schmexus: Understanding Nexus - The Blytheco Blog
Nexus Schmexus: Understanding Nexus

Nexus Schmexus: Understanding Nexus

Part 1 – Understanding Nexus

If my business does not have a building in that state or an employee living there, then we don’t have nexus there, right? Wrong. It is not quite so cut and dry.

First let’s look at the definition of nexus:

nex·us [ néksəss ]

  1. connection: a connection or link associating two or more people or things

More specifically, the term nexus pertaining to tax law describes a situation in which a business has a “nexus” or physical presence in a state. Nexus determines whether a business is subject to collecting and remitting sales taxes for sales within that state. Now, to define what constitutes “presence” – well that is not so easy.

Federal government decided it best (for the time being anyway) to allow each state to define the presence required for nexus. It started out that most states defined nexus as to be an office, warehouse or employee living in that state. Fast forward to the present and it gets pretty confusing. The lines have grayed over the years with the states in dire need of money.

States are broadening the definition of nexus. Some states are taking it as far as deciding that soliciting business in the state implies nexus. Having an affiliate in a particular state may cause you to have nexus in the state where the affiliate is located. Even attendance at trade shows is coming into question as to whether that constitutes “presence” in the state where the trade show is held. Here are some additional reasons nexus might be determined.

If you…

  • Have your own delivery trucks that cross state lines to deliver product.
  • Visit a customer in a particular state multiple times in a year.
  • Consistently ship a product into the state–the product might be constituted as physical presence.

…you might have nexus. (I am feeling a “You Might Be A Redneck” joke coming on…but I digress)

Consider this example from Netflix:

“Despite our best efforts to convince them otherwise, state officials have determined that the Netflix Service is subject to sales tax in nearly every state. If an Internet business has a physical presence (in this case, rented DVDs) in a state, the business must collect use tax for products used in that state. Because the rented DVDs in customers’ homes are “owned” by Netflix, we in fact have a physical presence in the state and therefore must collect tax.”

With the highly advertised Amazon battles with a number of states, it is pretty much common knowledge that the states are looking for revenue-making opportunities using sales tax due to huge deficits. Sales tax is the main source of revenue for states. Identifying new ways to define nexus is one method states are using to bring in additional sales tax revenue. Each state is looking strongly at out-of-state companies doing business within their state, but who are not currently collecting and remitting the sales/use tax due.

Part 2 – How it affects your business

As mentioned earlier, states are looking to sales tax as a way to generate more revenue. Translation – they will be looking for more companies that owe the state sales tax through nexus. Be sure that you do an internal review and know your nexus responsibilities― if left to the state to discover, it will likely be more painful.

If a state feels that you have nexus, but have not been remitting sales/use tax, you could get penalized for every year you have been doing business in that state. There are, however, several states now that will grant you amnesty if you voluntarily disclose to them the details about your business in their state. In those cases if it is determined that you do have nexus, they will put a limitation on the number of years they will go back on an audit. But voluntary disclosure is only available for 30-45 days during the year and is not offered every year in most states.

Part 3 – How To Protect Yourself

  • Understand the rules of nexus in every state in which you do business.
  • Maintain access to the most current rules, rates and regulations and any changes for each state.
  • When a state redefines nexus, identify whether or not you have become liable for collecting and remitting state sales and use tax to jurisdictions where you previously did not have to.
  • Reduce your exposure through automated processes and accurate documentation.

States are scrutinizing sales within their borders for a way to generate more revenue through sales and use tax collection, so be sure to do your homework and know what each states nexus rules are.

Join us for a webinar to learn the most effective way to protect your business from nexus schmexus complications: “Become Best-In-Class by Automating Sales and Use Tax Compliance” on Thursday, July 7, 2011 10:00 am PDT.

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