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Tax & Assurance Guidance

Sales Tax – Evolving Nexus Standards

Posted on June 24, 2014 by

Jim Biehl

Jim Biehl

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Almost all 50 states have a type of sales tax. This tax often helps fund vital projects such as roads, police, fire, and other public safety and works. States expect employers doing business and having nexus in their respective states to register and remit sales tax in a timely manner. Traditionally, brick and mortar stores were only subject to sales tax if they had a tangible, physical presence in the state. However, as cash strap states are trying to find ways to fill holes in their budgets, they are becoming more aggressive with on-line and out-of-state retailers with no physical presence in their state. Unsuspecting retailers are receiving notices and tax bills from states for sales tax remittance they were not aware they were obligated to make.

Physical Presence Threshold

It is clearly understandable to businesses that if you have a permanent presence in a state that charges sales tax then you have an obligation to collect and remit this tax. What is not clear to most businesses is that a simple occasional delivery or visit to a respective state has the possibility of triggering sales tax nexus. Unfortunately, there is no uniform nexus trigger among states.

For example, the Florida Department of Revenue recently ruled that a company, who sold heavy equipment to customers from outside of Florida and did not have any employees residing in the state, was subject to sales tax because the company made deliveries using their own vehicles and accepted Florida equipment as payment. In a similar case, the Indiana Department of Revenue recently issued a letter ruling upholding sales tax assessed against an out-of-state retailer. The retailer made regular service trips and sold fire suppression products to customers in Indiana. Even though the retailer did not have a permanent establishment in Indiana or Indiana employees, an occasional presence in the state was enough to trigger nexus.

Many states have attempted to help businesses and create a “safe harbor” standard based on how many visits or types of activities a company can perform in a state without being obligated to collect and remit sales tax. Unfortunately, compliance is difficult because the standards are not uniform.

Related Party Nexus

Traditionally, a connection to a related affiliate or party doing business in a state was not sufficient to create nexus. Unless the related party acted on behalf of the out-of-state business, such as accepting returned products, the two were considered separate. However, New Mexico, West Virginia, Kansas, Iowa, Maine, and Missouri all recently passed laws that classified the out-of-state business as having nexus and “doing business” in their states if a related party:

  • Used similar trademarks, trade names, or service marks.
  • Sold similar goods and services.
  • Performed other related activities.

The New Mexico Court of Appeals recently ruled that Barnesandnoble.com LLC, an online store with no traditional physical presence in New Mexico, had sales tax nexus in New Mexico because a related book selling company with a physical presence in New Mexico promoted Barnesandnoble.com in their stores and helped “to establish and maintain a market in New Mexico.” Furthermore, the Court wrote that using Barnesandnoble.com LLC trademarks in its stores also created “substantial nexus.”

Click Through Nexus

In attempt to gain a greater market share, online retailers are paying commissions to unrelated websites that link customers to the online retailer’s website. Similar to related party nexus laws, click through nexus laws attempt to assign nexus to a business with no physical ties to a state. Unlike related party rules, the two parties do not have to be affiliated. Specifically, these laws look through the transaction to the unrelated website owner’s state of residence.

New York’s highest court recently heard a case related to click through nexus laws. Amazon.com was receiving customers through an unrelated website and paying the owner of the website commissions. Neither Amazon nor the website owned physical property, employed New York residents, or shipped goods to New York under the transaction. However, the owner of the unrelated website was a New York resident. New York’s click through nexus law stated that since this was the case, Amazon.com was responsible for collecting and remitting sales tax to the State of New York. The high court agreed and Amazon.com was forced to pay sales tax.

In addition to New York, Illinois, Kansas, Maine, Minnesota, and Missouri all have passed similar laws. However, Illinois’ highest court recently struck down the state’s click through nexus law. The court ruled the law violated the Commerce Clause of the US Constitution and was preempted by the Federal Internet Freedom Act.

As states are becoming more aggressive and business is evolving from traditional brick and mortar stores, unsuspecting business owners may be surprised by a sales tax obligation they never knew existed. It is crucial to thoroughly research and stay informed regarding the ever changing patchwork of laws regarding sales tax nexus.

Jim Biehl

Shareholder

Leading the firm’s manufacturing & distribution group, Jim has built a reputation for providing strategic tax, accounting and operational support to owners.

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