Friday, August 17, 2007

Golden Rule: Nexus

Do you have nexus in a particular state? If you do, then you should be collecting sales or use tax on any taxable sales you're making in that state and filing a return. Even if you don't make taxable sales (e.g. everything is for resale) you probably still need to be registered and filing zero returns. And, of course, you should be getting those resale certificates that prove you're making non-taxable sales.

Here are three simple questions to ask:

1. Do you send people into the state (or already have people there) who are involved in the sales, marketing, delivery, installation, training, set up, or even the repair of your products and services? Are they there more than a couple of times per year? They don't have to be employees. They can be contractors or even manufacturer's reps. And they don't have to live in the state.

2. Do you have any facilities, offices, warehouses, or plants in the state? In other words, are you taking up space in the state. And you don't have to own the facilities. You can rent or even sublease the space.

3. Do you have a lot of tangible personal property in the state (e.g. inventory, property you lease to others, property used executing contracts, etc.)?

If you meet any one of these tests, then you should be worried about nexus in that state. That is the Golden Rule of Nexus.

What should you do?

1. Summarize all the states you're worried about and identify the amount and type of the sales and what conditions might give you nexus.
2. Review the state's nexus laws recognizing that they are subject to a lot of interpretation, court cases, constitutional restrictions, etc. Many nexus laws are completely invalid due to the Supreme Court decisions including Quill.
3. Still worried? Contact an sales and use tax expert who specializes in that state.
4. Don't ignore the problem. You have no statute of limitations protection in most states. Which means, if they catch you, they can go back billions of years.

I've written quite a few articles on nexus so please feel free to further explore this topic.

The Sales Tax Guy
(see disclaimer)


turtle said...

We're contractor for a nation-wide company. The contract is signed in Houston, Texas, where our office is located. Per this contract, we performed services for the customer at different locations in different states. The service includes materials and labor. For each location, we hire local subcontractors to perform the work and we bill the customer's headquarter in Houston. Our sales rep. does not travel to the job sites. Do we suppose to collect applicable sales and use tax at each location? And if so, do we need to apply for sales tax permits in these states? Your help is greatly appreciated.

Jim said...

Yep. Even if you hire contractors to perform the work, you've got nexus in most states. They're acting for you and representing you. That's pretty much the test. The question is whether or not you make taxable sales in those states.

As for registering, get a lawyer. NEVER do this yourself - there is too much financial exposure to stumble around in this area. Find a CPA or lawyer who is an expert in sales and use taxes - in other words, this is their primary practice. If you need a name for your state, post a comment (with an email address) and I'll email you one.

And I've got a whole section in the blog on this one

turtle said...

Jim, thank you kindly

Anonymous said...


Jim said...

It worked. Why???