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"The Sabrix Nexus Determination Services Include: Review of your sales tax nexus report with Sabrix tax experts to provide your organization with an understanding of the report findings."
Source : Sabrix
Five Things to Understand About Your Nexus Footprint
Sales Tax Nexus
is also known as :
Charge Sales Tax
General Sales Tax
Income Tax Rate
Nexus Sales Tax
Retail Sales Tax
Sales and Use Tax
Sales Tax Calculator
Sales Tax Form
Sales Tax Forms
Sales Tax Audit
Sales Tax Nexus Definition,
Sales Tax Nexus Rules,
Sales Tax Rate,
Sales Tax Rate Software,
Sales Tax Rates,
Sales Tax Refund,
Sales Tax Revenue,
Sales Tax Service,
Sales Tax Services,
Sales Tax Software,
Sales Use Tax,
State Sales Tax Nexus,
Concept Sales Tax Nexus,
Creates Sales Tax Nexus,
Nexus Salestax Laws,
Use Tax Nexus.
Understand how to monitor your business activities as well as how states
Nexus, Latin for a connection or common link, was never meant to be a
threatening word. But for businesses today, the threat of creating sales tax
nexus within a taxing jurisdiction has given the word a new and highly negative
connotation. Small- to mid-sized and fast-growing companies in particular are in
a double bind regarding sales tax nexus: they’re sizable and busy enough to find
themselves in the increasingly broad sights of local tax officials, but they
typically lack the expertise and means to minimize their tax liability and audit
The complexities and fluidity of nexus can be overwhelming and require the
constant attention of a tax expert to navigate, but most small- to mid-sized
businesses cannot afford that kind of resource internally. Meanwhile, the
penalties of undercollecting, underreporting and underpaying can be huge — and
there’s rarely a statute of limitations, meaning states can go back for years to
collect what’s due if they discover you haven’t properly met your sales and use
If it is determined that you should have collected the tax from your
customer, and you failed to, then you just reduced your profit margin. Sales
taxes should not be a direct cost to a seller — rather you should act as an
agent for the state. But, if you didn’t collect the tax, you just increased your
cost by the tax that you should have collected. Can your business absorb the
impact of an average tax rate of 8 percent? You normally have the option to try
to collect the tax due from your customers — but what if they are no longer a
customer, out of business or just refuse to pay you years after the transaction
occurred? Then there goes your profit. And that is just the tax amount. Add to
this penalties and interest. Even if you survive an audit unscathed, the process
itself can be a significant time and resource drain.
Revenue-hungry states are becoming increasingly aggressive in attempting to
catch transgressors. But forewarned is forearmed. To help you reduce your
exposure, this paper examines the significance and the vagaries of sales tax
nexus. It discusses the activities that create nexus, what having nexus requires
you to do, the key mistakes to avoid when completing a state nexus
questionnaire, and how to deal with problems you may discover. It concludes with
an examination of new options for outsourcing sales and use tax management, to
relieve the potentially enormous resource burden that sales and use tax
management can exert while helping to ensure the highest degree of sales tax
Small- to mid-sized and fast-growing companies in particular are
in a double bind regarding sales tax nexus: they’re sizable and busy enough to
find themselves in the increasingly broad sights of local tax officials, but
they typically lack the expertise and means to minimize their tax liability and
I. WHAT IS NEXUS… AND HOW CAN IT IMPACT YOU?
Sales tax nexus defines the level of connection between a taxing jurisdiction
such as a state and an entity such as your business. Until this connection is
established, the taxing jurisdiction cannot impose its sales taxes on you. Nexus
determination is written into the US constitution where the Due Process Clause
requires a definite link or minimal connection between a state and the entity it
wants to tax. After that, nexus gets foggy and complex.
There is no specific shared definition of nexus across the 50 states.
Moreover, definitions and rules for determining nexus change constantly, and
most states are careful to give themselves room to maneuver in their
definitions. This means that a business must look at each state individually
when determining sales tax nexus, and must stay constantly on top of a slew of
changing regulations and interpretations.
Here are two representative definitions of Nexus that most states would more
or less agree with. As you read them, you can almost feel the steel jaws
starting to clamp around you:
“Maintaining, occupying, or using permanently or
temporarily, directly or indirectly or through a subsidiary, an office,
place of distribution, sales or sample room or place, warehouse or storage
place or other place of business.”
“Having a representative, agent, salesman, canvasser,
or solicitor operating in this state under the authority of the retailer or
its subsidiary on a temporary or permanent basis.”
These definitions — which focus around having a business presence in a state
— are just starting points for determining nexus. As we’ll discuss, there are
innumerable details, timescales, vagaries and state-by-state idiosyncrasies
involved. But the point is, if you have knowingly or unknowingly created nexus
in a state, then you are subject to some very strict obligations.
IMPLICATIONS OF NEXUS: WHAT ARE YOUR OBLIGATIONS?
If you have created nexus within a state or other jurisdiction, you are
obliged to register as a retailer and collect and remit sales tax on all taxable
sales into that jurisdiction. You are also obliged to obtain exemption
certificates on all tax exempt sales into the jurisdiction.
Further, you are also required to remit use tax on taxable purchases if
delivered within that jurisdiction and the vendor did not collect tax from you.
You also must remit use tax on taxable advertising and promotional items (trade
show giveaways, in-store handouts, etc.) that you might distribute in the
As you might suspect, it is incumbent on you to accomplish all of the above
in a timely and accurate fashion. Even when you do it all correctly, you are
still potentially subject to audits by the jurisdiction.
NEXUS ENFORCEMENT: STRONG ARM OF THE LAW
As federal funding to states has diminished, states have become much more
aggressive in identifying and collecting all the tax revenue they can. They are
looking harder for transgressors, hiring more tax auditors and sending their
auditors out more frequently.
Here are some of the tools and tactics that states use to determine who to
pursue and audit:
Nexus questionnaires are among a state’s primary
enforcement tools. States periodically send out mass mailings indicating
that the receiving company may be subject to reporting and collecting sales
tax in the state. These mailing typically include nexus questionnaires that
must be filled in and returned promptly. Ignoring these questionnaires is
not an option because doing so can eliminate potential settlement options
down the road. Nexus questionnaires are designed to ferret out activities
that you may be engaging in within the state, and your answers can trigger
further inquiries. Hence extreme care should be taken when responding to
their questions. Seeking professional tax help is highly encouraged because
simply checking “yes” to some questions can easily lead to a
determination of nexus. If your activities in the jurisdiction are limited,
it might be better to respond with a letter in lieu of completing the
Nexus task forces are state revenue department
commando units. They are actively looking for companies with activities in
the state to prove nexus. Among their hunting grounds are truck weigh
stations, trade shows, large construction projects, and airports, harbors
and even marinas. They don’t even have to be out patrolling — they can sit
back and conduct highly fruitful Web site and phone directory research as
Multi-State Tax Commission audits are another way to
get snared. The Multi-State Tax Commission has a joint audit program open to
participating member states. Participating states nominate and vote on which
companies to target, and the commission then conducts an audit on behalf of
all the states concurrently.
Nexus questionnaires to vendors add yet another net in
which to catch you. During an audit, vendor invoices will likely be
reviewed. Auditors can thus easily compile a list of a company’s vendors and
then send nexus questionnaires out to those companies as well. If there have
been charges invoiced for on-site training or other services, that counts as
proof that the vendor has had an in-state presence. In fact, a nexus
questionnaire might not even be sent — just a notice of an audit
...it is incumbent on you to accomplish all of the above in a
timely and accurate fashion. Even when you do it all correctly, you are still
potentially subject to audits by the jurisdiction.
The first step is to evaluate all the activities you are engaged
in, in each jurisdiction where you do business.
II. DETERMINING YOUR NEXUS EXPOSURE
With taxing jurisdictions going all out to prove your nexus exposure, your
first line of defense is to stay on top of the exposure yourself, so that you
are not at risk of underreporting and underpaying taxes. The troublesome thing
is, this is very hard to do across all 50 states and other jurisdictions,
especially given the complexity and changeability of the rules.
Pinpointing the basic activities that create nexus
The first step is to evaluate all the activities you are engaged in, in each
jurisdiction where you do business. During this in-depth review, you need to
answer such fundamental questions as:
Where do you maintain a permanent place of business?
This includes corporate offices, sales offices, warehouses, manufacturing
facilities, and leased property at customer locations.
Where are you operating, or have you operated, a
temporary place of business? This includes trade show booths and suites,
sales meetings, training sites, and movable equipment at work sites.
Where do you have individuals permanently operating on
your behalf? This includes administrative employees, employee salespeople,
manufacturer representatives, service personnel, and agents.
Where do you have individuals temporarily operating on
your behalf? This includes traveling sales people, traveling manufacturer
representatives, traveling service personnel, owned delivery vehicles and
That’s the easy part. Now it gets more nebulous and
MONITORING YOUR BUSINESS FOR NEXUS
The next step — and it’s an on-going one — is to monitor
your business for nexus. You need to constantly stay on top of the level of
activity and visibility of the previous activities. This is where many of the
complexities and state-by-state idiosyncrasies raise their heads.
To begin with, you need to ask how frequent and how
prolonged are your visits to a jurisdiction, and you need to be aware of each
jurisdiction’s rules. For example:
Are you doing trade shows? Trade show rules differ by
state. In California, it takes 16 days of trade show activity in a
twelve-month period to create nexus. But in Texas, just one day suffices.
Do you have an employee actually residing in a state?
In all states, that alone is enough to create nexus.
Did you sign a contract in a state? That significantly
raises the chance of nexus, even if it was your agent and not your employee
Did you send anyone to perform installation or
training services? If so, you’re creating nexus, whether it’s your agent or
employee providing the services.
Did you ship products into a state via common carrier
or company leased or owned truck? If it’s a common carrier, you’re probably
okay. But if it’s your owned or leased truck, you’ve likely created nexus.
The visibility of your activities also comes in play in
determining how easily the state will find you. For trade shows, were they open
to the public? If so, your presence can be easily seen and noted by the state.
Are you advertising locally, including providing in-state contact information in
phone and industry directories? If so, you have a target on your back. And are
you selling to any state or local agencies? If yes, your nexus is now well-known
as most states cross reference their suppliers against the registered taxpayer
database. In fact, some states prohibit contracting with a supplier that isn’t
registered to collect sales and use tax in their state.
Finally, you have to pay attention to the economic impact
of your activities. For example, what is the dollar value of your average sale
into a jurisdiction, when did your sales and other activities commence, and what
is the total amount of sales into a jurisdiction since activities began?
You also have to determine what percentage of your sales
are taxable. Some sales will qualify for an exemption. But it’s up to you to
know which are exempt and which are not, and you need to obtain proper exemption
certificates for your exempt sales (don’t count on being able to get them after
the fact, because that isn’t always allowed). How your invoices are written is
important too. In some states, a normally exempt item becomes taxable if it is
not itemized as a separate item on an invoice. Proper resale certificates are
equally important. If they are not on file, an auditor will likely determine an
error rate and project across the audit period to assess tax, interest and
You need to constantly stay on top of the level of activity and
visibility of the previous activities. This is where many of the complexities
and state-by-state idiosyncrasies raise their heads.
III. DEALING WITH NEXUS ISSUES
After you’ve done all this work, what do you do when you discover you have
created nexus? If you have just established nexus, it’s simple: register with
the jurisdiction(s) immediately and begin collecting sales tax. But if nexus was
created sometime in the past and you haven’t registered, then you have a
problem. Fortunately, you also have some options to consider that may decrease
the negative impact:
Voluntary disclosure is a very good proactive option,
provided it’s open to you. In states with voluntary disclosure programs, the
usual course is to write an anonymous letter to the state, under the aegis
of a third party, describing your activities and their duration within the
state. An agreement can often then be reached that leads to a limitation in
open years and an abatement of penalties. The Multi- State Tax Commission
mentioned earlier runs a national program enabling businesses to enter into
voluntary disclosure agreements with multiple states. Whether to pursue
voluntary disclosures directly with the state versus through the Multistate
Tax Commission requires an analysis of the pros and cons of each. An
experienced state and local tax consultant can help you determine the right
path for your business.
Amnesty for uncollected or unpaid sales taxes is also
available periodically as states implement amnesty programs. For states
participating as members of the Streamlined Sales and Use Tax Agreement,
amnesty may be available. Other individual states sometimes offer amnesty
programs as well.
Reach out to your customers and determine if they have
either paid the use tax directly to the jurisdiction or qualify for an
exemption. If they can certify that the tax has been paid or provide you
with a valid exemption certificate, these amounts can usually be deducted
from your liability for prior periods. However, relying on your customer to
pay the tax going forward is not an option. If you have nexus, you have the
obligation to collect the tax.
Be careful about when you start collecting
One thing you do not want to do is start collecting sales taxes prior to
being registered with a jurisdiction — it’s flat-out illegal and penalties can
apply. In fact, in most states, this is considered criminal fraud. However, some
states might let you start collecting the tax once you’ve filed for a voluntary
disclosure even if your registration process is not yet complete. In these
cases, you need to remit what you’ve collected immediately upon the completion
of the registration.
Occasionally you may find yourself in the situation that
you are registered with a jurisdiction, but there is no nexus. In these cases,
you can contact the jurisdiction and cancel the registration. But it is not a
slam-dunk. You can expect to be scrutinized, so make sure you’re correct in your
One thing you do not want to do is start collecting sales taxes
prior to being registered with a jurisdiction — it’s flat-out illegal and
penalties can apply. In fact, in most states, this is considered criminal fraud.
In these situations, you can elect to continue to collect and remit taxes as
a “voluntary filer” if you think there will be some business despite your lack
of presence in the jurisdiction. If the state recognizes the voluntary filer
status, there may be a reduced administrative burden such as less frequent
filing frequency or simplified rates to apply.
IV. MINIMIZING THE IMPACT OF NEXUS
If there is one takeaway from this paper, it is that dealing with sales tax
nexus, its implications, and the ever-shifting landscape of sales tax
requirements is a complex and time-consuming process. It can also be very
expensive, in terms of internal resources as well as penalties when you don’t
get it right. According to a 2006 independent survey of more than 500 finance
executives, small to mid-sized companies average more than $327,000 in annual
costs to manage sales tax compliance, yet still end up paying an average $32,000
each year in penalties and interest due to errors and omissions.
Clearly, for small to mid-sized companies, trying to manage sales tax
compliance using only in-house resources and relying on manual processes is a
costly mistake. If you’re a fast growing company, the mistake just compounds
each time you enter a new revenue-hungry taxing jurisdiction, launch a new
product or services, add a new line-of-business, acquire a new company, etc.
Thus, it’s highly advantageous to seek outside help, both to raise your sales
tax compliance expertise and to bring down your costs of compliance.
We recommend the following course of action:
Be proactive. Don’t wait until you receive a nexus
questionnaire — leverage outside professional sales tax services and counsel
to help you conduct a thorough nexus study of your activities upfront, and
continue leveraging these expert resources as you grow to help manage your
nexus exposure. In the long run, it’s substantially less expensive than
trying to hire, train and maintain expensive in-house expertise.
Automate. Manual processes for managing sales tax are
time consuming, resource-intensive and error-prone. Automation streamlines
the process and eliminates the errors. Where this was once only an option
for larger enterprises, new on-demand and managed services now enable small
to mid-sized companies to enjoy the benefits of automation, coupled with a
range of essential services including expert tax research, automated
preparation of monthly audit data and signature-ready returns, and on-demand
professional help in managing audits should they arise.
The one thing you don’t want to do is trust that you can continually cover
all the bases of nexus by yourself. Nexus is stealthy — it creeps up on you,
leaving you sitting on a hidden penalty and interest time bomb. Nexus is
multi-faceted — there are so many ways to fall into it, state by state. Nexus is
dynamic — the rules change continuously. Nexus is necessary — at least to taxing
jurisdictions, which are increasing creative and aggressive in their
To learn more about understanding your nexus liabilities or managing the
associated compliance obligations we encourage you to contact us.
Be proactive. Don’t wait until you receive a nexus questionnaire—
leverage outside professional sales tax services and counsel to help you conduct
a thorough nexus study of your activities upfront, and continue leveraging these
expert resources as you grow to help manage your nexus exposure.
ABOUT YETTER CONSULTING SERVICES
Yetter Consulting Services, Inc.
(YCS) is a transaction tax consulting firm that offers clients the
highest quality sales and use tax guidance by understanding their needs,
increasing their awareness of current tax issues and trends, and providing
effective tax-related solutions.
A Sabrix MTS Trusted Advisor Partner, YCS offers sales tax
consulting services, including nexus studies, voluntary disclosure negotiations,
audit defense, process reviews, and research/taxability analysis. YCS also
provides sales tax training seminars and online training under the Sales Tax
Institute, a division of YCS.
In addition to sales tax consulting services, YCS, a
Sabrix Certified Implementation Specialist and Tax Consulting partner, provides
sales tax implementation services, including Sabrix configuration, integration
design, taxability research, testing and project management. YCS focuses
exclusively on its clients' needs regarding sales, use and miscellaneous state
and local transaction taxes and services a client base from small businesses to
Fortune 100 entities.
For more information on Nexus Services, contact Yetter
Consulting Services at 312.701.1800 or
Sabrix, Inc. is a leading provider of transaction tax management for
companies of all sizes, enabling finance, tax, and IT professionals to achieve
accurate, timely, and cost-effective compliance for sales tax, use tax,
Value Added Tax (VAT), excise tax and industry-specific taxes and fees.
The Sabrix Solution combines the Sabrix Application Suite software for sales
tax, use tax and value-added tax automation with Sabrix Tax Research, delivering
SAS 70 certified tax rates and rules for the U.S. and 170 countries. The company
also offers the Sabrix Managed Tax Service™ (MTS),
an outsourced transaction tax compliance service that helps finance departments
of small-andmedium- sized businesses eliminate the hassle, control their audit
exposure, and reduce the total cost of compliance. Sabrix MTS seamlessly
integrates with a company’s existing accounting and e-commerce systems, and,
similar to outsourced payroll services, operates as a trusted extension of a
company’s finance department to address tax compliance from start to finish:
address validation, tax rate maintenance, tax determination and calculation,
returns preparation and filing as well as audit research and documentation. For
more information, please visit www.sabrix.com.
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- What is Nexus and How Can it Impact You?
- Implications of Nexus: What Are Your Obligations?
- Nexus Enforcement: Strong Arm of the Law
- Determining Your Nexus Exposure
- Monitoring Your Business for Nexus
- Dealing With Nexus Issues
- Minimizing the Impact of Nexus
- About Yetter Consulting Services
- About Sabrix