States auditors continue to crackdown on “out-of-state” businesses that are not compliant with their local state sales tax laws. The motive is quite clear as it is estimated that over $23 billion of sales taxes remains uncollected each year. Given that backdrop, it would be prudent to ensure that your business is following all state and local sales tax laws. This is especially important for businesses that have independent sales representatives located in different states throughout the country as this is an area that is often misunderstood.
Understanding sales tax nexus
Tax nexus can best be defined as the seller’s minimum level of physical presence within a state that permits a taxing authority to require them to register, collect and remit sales and use taxes. In determining whether an out-of-state seller needs to comply with tax nexus laws, it is appropriate to examine a combination of federal and state laws. Having said that, if de minimis activities are performed within a state that establishes only the “slightest presence” in a taxing jurisdiction, it is unlikely that the seller will need to register and collect sales tax in that area. If the company has more than a de minimis physical presence in the state, then sales tax registration and collection would likely be required. Most states characterize “doing business in their state” as regularly or systematically soliciting business either by employees, independent contractors, agents or other representatives or by distribution of catalogs or other advertising matter. It is important to know the rules in each state where your company conducts business.
Is your business merely soliciting orders across state lines?
It may be possible to argue that the nature of the solicitation work was so incidental that it falls under Public Law 86-972. This refers to the Interstate Income Act of 1959 that essentially allows a business to send representatives into a state to solicit orders for goods without being subject to an net income tax. If actual services were performed, then that’s different. It is important to note that this law only applies to the sale of tangible personal property and not to services. Thus, your sales representatives may still create sales tax nexus if the intent of the solicitation is for taxable services. Keep in mind though, that in many states services are sales tax exempt.
More questions? Browse answers or ask sales tax questions online.
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Tags: sales tax questions, tax nexus questions, business tax questions, Ryan Himmel
