Evaluate State Sales Tax Nexus With These 10 Questions
- Mar 13, 2015 | Ryan O'Donnell
A question we consistently get from online retailers is, "How do I determine where I have nexus?" For those who are new to the subject, we recommend you review our definition of nexus. It helps establish the fundamentals of how to think about your sales tax exposure.
Once you feel you have an understanding of nexus, it's time to review the states you may have nexus in. The only way to truly understand which states this includes is to review your business operations.
The following is a list of 10 key questions you should consider when reviewing your business to understand your state nexus exposure. This is in no way a complete list, but it highlights the most common nexus triggers. Review your answers with a certified tax professional or contact Avalara Pro Services for if you have questions or need further assistance.
1. Do you have an office, warehouse, and/or business location in the state?
An office within a state is the #1 way nexus is triggered. The type of office is irrelevant. It can be a home office, a building, or even a PO box. The address you provide during your business registration will be your first nexus state.
2. Do you have any tangible personal property (e.g. equipment or inventory) in the state?
Online retailers frequently outsource product fulfillment to services like Fulfillment by Amazon or Shipwire. This choice reduces time spent boxing and shipping products, but it also exposes your business to nexus in other states.
3. Do you have any remote employees in the state?
With the rise of the internet economy, hiring a remote workforce has become much more common. Bear in mind a remote employee is different than a remote freelancer.
4. Do you have any employees visiting this state to solicit sales?
Be wary of having employees cross state borders for work. If you find your company is sending workers to new states in the name of selling your product or service, you may be picking up nexus in a new state. It frequently boils down to whether the employee is entering the new state to expand market share.
5. Do you have any agents or third-party representatives selling on your behalf in this state?
It is very common for small companies to leverage third-party services to move forward. The cost per hour may be higher, but by not committing to the worker as an employee, there are big savings. Moreover, should the relationship not work out, it is easy to sever ties with a third-party service.
6. Do you have any employees visiting this state to perform activities for customers?
Many products and services require a trained expert for initial set up. If you have employees engaging in activities such as training, installation/warranty/repair, and/or providing technical assistance for customers, you may have triggered nexus.
7. Do you participate in trade shows or conferences in this state?
From CES to PAX to AICPA, there seems to be a conference for every industry and every type of product or service. There are a number of reasons why attending a conference can be a boon to your fledgling business. Making contacts, showcasing new products, and signing deals are just a few of the many reasons to attend. But, be careful, this activity can lead to a newly triggered nexus event.
8. Do you hire any third-party representatives that perform activities for customers?
As previously mentioned in #6, having employees enter states to perform activities for customers may be a nexus triggering event. You should also be wary of outsourcing such activities to third-party representatives. This may trigger nexus as well.
9. Do you have any third-party representatives soliciting your orders in this state?
Just like your company sales team, having third-party representatives soliciting within a state may trigger nexus. If you have a strong online presence, be sure to review any affiliate marketing relationships (online or offline) you may have. Affiliate nexus is a very real classification that can quickly expand your sales tax exposure as your product or service becomes more widely known and more affiliates seek to work with your business.
10. Do you promote your business or solution using web-based advertising?
The staggering reach of the internet can be a blessing for small businesses as they seek to quickly and cost-effectively expand their customer base. From a sales tax perspective, however, such advertising may come at a cost. Web based advertising can trigger nexus when a business is paying an affiliate to advertise their product. Beware of purchasing web advertising with organizations that don't specialize in advertising (Google, for example).