For tax purposes, nexus is defined as: the minimum connection or link necessary, which allows a state to tax you or force you to collect taxes on its behalf. This minimum link can vary from state to state as well as from tax to tax. Some nexus-creating activities are obvious, others less so.
If you would like to see the 6 most common nexus-creating activities visit out "Got Nexus?" page!
The best way to determine if you have nexus is by making a list of all your activities in each state and then reviewing the states guidance for whether or not you have nexus on a tax by tax basis. If this task appears daunting, you may consider organizing your list into manageable groups, such as the top five revenue-producing states, and so on. Or you may prefer to outsource the process. We have three programs to help you determine your nexus footprint: nexus consultation, nexus review, and a nexus study.
Warning! Mitigation May Be Necessary
Once you have determined your nexus footprint, do not get registered without first determining if what you sell is taxable, and if so, if you have any past exposure. If you have never been registered, states will probably want you to pay back taxes, penalties, and interest for the past seven to 10 years, or longer. If you do have past exposure, you will want to review some options on how to mitigate your liabilities.
Some of the options available include:
Voluntary Disclosure Agreements (VDAs) – In order to encourage potential taxpayers to step forward most states offer VDA programs. A VDA is usually requested anonymously by a third party. Acceptance into a VDA program will usually limit the look-back period to three to four years, an advantage over the usual seven to 10 years if the state finds you. The taxes, penalty, and interest due prior to the look-back are usually not considered and are closed to audit upon completion of the VDA. In addition, most states will waive 100 percent of the penalty and a lesser number will waive some or all of the interest on the taxes in the look back.
The biggest drawback of a VDA is that you usually must request one before the state contacts you. Most states will disallow participation in a VDA once they find you. However, each state has its own guidelines and procedures; some written some not. Due to the large numbers of VDAs we complete on behalf of our clients, we have created our proprietary state-specific VDA knowledge base. We also have ongoing relationships with the VDA auditors, which helps us navigate some of the tougher VDA situations we see.
State Amnesties – Another way states encourage taxpayers to step forward is by offering amnesties. Amnesties are usually easier to qualify for, provide for an easier process, and are usually more generous when it comes to interest waiver. It is important to note that these amnesties are not true amnesties; back taxes at the very least must be paid. In fact, most states waive 100 percent of the penalty, but the amount of interest varies widely from state to state. Amnesties are usually short in nature, lasting between 30 and 90 days. They are also offered on an infrequent, irregular basis. Perhaps the biggest drawback to amnesties is the fact that most do not offer a limited look-back. In general we prefer VDAs over amnesties; however, each amnesty is different and we analyze all amnesties as they are announced.
Streamlined Sales Tax Project (SSTP) Amnesty – The SSTP is a group of states that have joined together to “simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance.” Currently, 24 states are participating; 22 as full member and two as associate members. States have to apply to and be accepted in order to become members. As part of the process of becoming a member a state has to offer a true sales tax amnesty from the time they are accepted as an associate member until 12 months after they become a full member. The amnesty waives all past due sales tax, penalty, and interest. The states currently offering a full sales tax amnesty through the SSTP are: Ohio, Tennessee, and Utah.
There are three major drawbacks of the SSTP. The first is that it only applies to sales tax, which means you may still have to do a VDA for other taxes. The second is that it is an all-or-nothing program. You must register for all the states even if you do not have any revenues in those other states in order to take advantage of the amnesty. The third drawback is one of timing. Because you register for all the SSTP states at once, you will need to complete VDAs in those states you have exposure prior using the SSTP amnesty. This can become complicated.
Despite the drawbacks of this amnesty, if your exposure is large enough in Ohio, Tennessee, or Utah it may make this option your logical choice.
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