Nexus: Where Ignorance May Not be Bliss

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The definition of nexus, as it relates to taxes, is a substantial physical presence between a business and a state.  This presence is the trigger which determines that state is owed various taxes for helping that business establish a market.  As it relates to sales tax it is at this point, when a substantial physical presence is reached, that a company must include sales tax liability on invoices to its customers in that state.

Sounds easy, right? If you’re like many companies out there, nexus is something that would be labeled a non-thought.  You collect sales tax in those states where you have offices, employees, or inventory (warehouses), and require your customers to self-assess on orders to any other state.  If your company expands you might look into potential for increased sales tax liability.  What you might not know is that every year states are updating the definition of ‘substantial’ in an attempt to increase their revenue streams, and that threshold becomes a little less.

Various activities that can trigger this substantial physical presence are: attendance of trade shows within particular states, travel of employees into a state to conduct sales, training, deliveries, installations, repairs, etc., use of independent sales or manufacturer’s representatives, the use of sub-contractors, and advertising in local media or phone directories, to name a few.

The reality is, there are many states that are operating with a revenue deficit, and the estimated $41 billion in uncollected sales tax is revenue that they can inject into their states without adding any additional taxes, all they need to do is one of two things.  First, they are auditing companies to assure compliance is occurring and companies are paying the due sales tax, and second they can update their view of the term substantial and create clauses, like they have in Michigan where just 2 days of solicitation into the state over a 12 month period can trigger nexus.

So what can I do from here you may be asking yourself.  Never stop learning, attend webinars, like our Nexus 101 Thought Leadership Series held on Thursday, October 18th at 1:00pm EST; subscribe to tax related blogs where professionals provide information on current events around taxes; and download whitepapers, like the ones Avalara put together on survival tips for nexus, and a general overview of the topic, available for download here.  When it boils down to it, keep yourself informed. Ignorance may lead to bliss but sometimes it may not;  in the instance of nexus, ignorance could very quickly lead to audits and penalties.

By Avalara, Sales Tax Software for Microsoft Dynamics

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