5 surprising ways to trigger a tax collection obligation
- Sales and Use Tax
- September 4, 2018 | Gail Cole
Nexus is the connection between a state and a business that enables the state to tax the business. When a business has sales tax nexus with a state, that business is required to collect and remit that state’s sales tax.
Having a physical presence in a state such as an office, storefront, or warehouse is the most obvious way for a business to trigger sales tax nexus. Yet physical presence in another state can be established in unexpected ways, especially when employees or independent contractors are involved.
Below are surprising ways to trigger a sales tax collection obligation through your most important asset: your people.
1. Telecommuting employees
Telecommuting can increase employee productivity by eliminating grueling commutes and reducing stress. For employers, it can reduce overhead and facilitate the creation of an all-star team. Businesses clearly see the benefits: Since 2005, the regular work-at-home employee population has grown by 140 percent, almost 10 times greater than the rest of the workforce.
Yet telecommuting can also trigger nexus if the employee is based in another state. A sales tax collection obligation is likely to be triggered when a telecommuting employee in another state helps its employer “exploit the state marketplace,” and it’s often assumed that a telecommuting “back-office” employee can’t trigger nexus. It can.
2. Independent contractors
Instead of increasing headcount, many companies rely on independent contractors to get work done. Independent contractors make up approximately 7 percent of the American workforce, not including contingent and alternative arrangement workers. Although that figure is down slightly since 2005, this segment of the workforce seems here to stay. Many people prefer the flexibility it affords, while companies can hire people for short-term projects without incurring employment-related costs.
One might assume there are no sales tax risks associated with using an independent contractor based in another state, but there are. For example, California law holds that a retailer is engaged in business in the state (aka, has nexus) if it has “any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property.” [Emphasis mine.]
Note that California doesn’t limit nexus-triggering activities to selling taxable goods. Using an independent contractor to assemble, deliver, or install tangible personal property can also trigger nexus. Similar activities trigger nexus in many other states as well, including New York and Texas. And Connecticut requires an out-of-state business with “any physical presence in Connecticut,” including “employees or agents,” to obtain a sales and use tax permit.
3. Traveling representatives
Nexus can also be established by traveling sales or service representatives, whether they’re employees or contractors. Under New York law, for example, “You must … register [for state and local sales tax purposes] if you solicit sales of taxable products or services through employees, salespersons, independent agents, or service representatives located in, or who enter New York State.” [Emphasis mine.]
This may not be the case in every state, and even similar laws can vary. For example, a salesperson or representative must be in Arizona to solicit sales or establish a market for more than two days per year for nexus to be triggered; a one-off visit won’t generally do the trick — though it could in another state.
4. Event attendance
It should come as no surprise that sending employees or independent contractors to an event (e.g., convention, trade show) in another state can establish nexus with that state, even if no sale is made during the trip. Exactly how much activity in a state will trigger sales tax depends on the state; and some states take a more aggressive stance than others.
In Illinois, Michigan, and Texas, for example, an out-of-state business can establish nexus if a representative spends one day in the state. Once established, nexus generally lasts for the remainder of the year.
Participating in a trade show in Florida may also trigger nexus, but it depends on the terms of the written agreement between the exhibitor and the sponsor. Generally, a business must register with the state if an employee displays tangible personal property or services at a trade show in order to make retail sales in Florida or mail-order sales to Florida customers. If the written agreement prohibits the sale of taxable property or services, or specifies that the exhibitor can makes sales for resale only, nexus may not be triggered.
5. Beyond physical presence
If employees and independent contractors can trigger nexus in other states for their employers, so can other activities.
Many states have enacted affiliate and click-through nexus laws to capture more tax revenue from remote sales. Under these, a business is considered to have a tax collection obligation when it generates business through its relationship with in-state affiliates.
Lately, affiliate and click-through nexus have taken a back seat to economic nexus, whereby a state bases a tax collection obligation on a business’s economic activity in a state. In June, the Supreme Court of the United States allowed South Dakota’s economic nexus law to stand in South Dakota v. Wayfair, Inc. It’s rocking the sales tax world.
While the full impact of the ruling is yet to be determined, Wayfair is making it easier for states to tax sales by remote sellers. To learn more about Wayfair and its impact on remote retailers, and to see a list of states with economic nexus, check out this Avalara resource page.
You need to know where you have nexus
Determining nexus can be tough, and once established, it can linger longer than you think. It may continue even after you cease doing business or having a presence in a state, through the end of the calendar year, or even longer. This is important to remember, especially if you trigger nexus through a temporary presence, like event attendance.
Not sure where you have nexus? Avalara’s team of tax experts can provide you with a custom nexus analysis.
Learn more about new nexus trends in Know Your Nexus.