Is Nexus Contagious?
Are Third Parties Carriers of the Nexus Bug?
Many of us have sales tax questions, but we aren't sure where to get answers. We subscribe to some of the best resources available today when it comes to state and local tax research. Chances are, whatever question you could possibly have, we can find the answer. Today, we thought it would be interesting to look at the actions of third parties and whether specific actions might cause you to have nexus in a given state. We say "might" because this article will be based on surveys conducted of state government officials and these answers come from them. You can expect them to be as aggressive as possible in asserting nexus, so take this with a grain of salt. But take it with a small grain of salt as the states seem to be successfully pushing the envelope on what's possible.If you're a seller making sales of taxable goods in a state where you have some third parties performing some actions or service in your behalf then we generally advise to err on the side of caution. This is tax you would collect from your customer and if there's a chance you would ultimately not prevail in your nexus arguments years from now, then you might consider getting registered if the facts indicate you might have nexus.
If you operate in multiple states, then you need to be ever vigilant in these difficult economic times because it appears states are being much more aggressive in looking for companies making sales in their state hoping that they can force them to collect sales taxes for the states. To do so, they must first determine that you have Nexus in their state.
So what is NEXUS?
Nexus (nex-us) - a means of connection; a link or tie.1
Your business has nexus if you have established a connection with the state in question. Clearly, physical presence in a state, in the form of a store or office, establishes nexus2. If you have a physical presence in a state, take notice: You now have the responsibility to collect taxes for the sales you have in that state if what you sell is taxable.
Unfortunately, the laws do allow states to force you to collect tax for them and to penalize you for not doing so if you have nexus. The courts have long agreed that the government is well within its constitutional authority to impose this duty on sellers with a physical presence in their state. Likewise, a state can also force you to pay tax on the taxable purchases you make in their state.
Third Parties Can Give You Nexus
This is a controversial area. Most companies are aware and usually comfortable with the idea that if they have employees or actual office locations in a state that they would have nexus. They struggle with the idea that otherwise unrelated third parties can also give them nexus depending on what they do. As we discuss in our webinars on nexus, it's pretty well settled, in most states, that if you use a subcontractor to do installations, repairs, construction or the like, that you will have nexus in those states. But let's look at some more activities by related and unrelated third parties and see what the states say about whether these would give you nexus also.
And The Survey Says...?
That's a lot of questions. Let's look at two of these questions. The two questions that seem to come up most frequently in discussions with our clients are regarding the third party installation and attending trade shows or seminars, and whether those give you nexus. Let's look in the top 5 states: CA, TX, FL, OH, NY and IL. On the first question regarding using third party installers or maintenance 3 out of the 5 states say that would cause you to have nexus in their state. Florida says "no" and NY abstained. In fact, NY abstained from answering any of these nexus questions. But take it from us, NY is on the leading edge of aggressiveness when it comes to asserting nexus. The fact that they did not answer the question should not lead you to conclude that they wouldn't say this is a nexus-creating activity.
On the second question regarding attending a seminar less than 4 times. Not one of the states responded that this would give you nexus (NY abstained on this one too.)
We Have a Chart for That -- You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. This particular matrix addresses this question of how the states view the activities of third parties. We offer this basic research to you at no charge for up to 10 states. If you like to receive one of these charts, please request it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.
CALL THE STATE? -- This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.
But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.
Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.
GOOGLE IT? -- With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?
GET A RULING? -- What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.
ASK THE EXPERTS? -- Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.
And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.
Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.
So What Questions Do You Have?
Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.
A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it's still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state's own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We're here to help, give us a call.