A Case Study in Materiality
We advocate being conservative when it comes to sales/use tax nexus. We don’t want your business to be destroyed by an audit out of the blue. When you haven’t filed sales tax returns in a state, the statute of limitations can be a lot longer or even nonexistent. If the state audits you, they could assess you for many years of back taxes. This is all true. And we don’t want you to suffer the Biggest Tragedy in Sales Tax.
HOWEVER, let’s be reasonable on this. We had a discussion not long ago with a credit card machine rental company. They had machines out on lease all over the country. They collected rent on the machines on a monthly basis. The rental amount per machine was fairly minimal, say $10 per month. Did they have nexus everywhere they had machines? Yes. Should they get registered and collect tax everywhere they have machines? NO. Well, maybe technically, they were required to do so, but had they asked us for our recommendation, we would have said to consider the cost first.
In some states, they had thousands of machines rented out. In one state that stands out in memory, they had one solo machine at one customer. The state was Rhode Island. They were collecting $10 a month in rental income. The rental of tangible personal property in RI is taxable. Owning property in RI does create nexus. But we’re talking about $.80 per month in taxes. Obviously, the cost of compliance (registration, monthly filings, even the postage on the forms) greatly exceeds the exposure from not collecting the tax. But, by the time we spoke to them, they had already registered and were filing returns in RI.
We recommended deregistration in RI based on this scenario.
Obviously this is an extreme example, but the principle of cost vs. benefit, should be considered when examining all aspects of sales and use taxes. Where to draw the line will be different for each individual company based on their own facts and circumstances. Should you need guidance in determining where you should draw the line we are here to offer assistance.