Nexus

If your business uses Fulfillment by Amazon (FBA) where Amazon handles third-party seller’s back-end operations, including storage, fulfillment and customer service, you may have sales & use tax nexus in those jurisdictions where the internet retailer has fulfillment centers.  Amazon will ship a FBA seller’s inventory to various facilities based on space or product demand in a specific region.

Maintaining inventory in a state will create sales & use tax nexus for a remote seller, potentially giving the seller an obligation to register, collect and remit tax and file sales tax returns.  Unfortunately FBA sellers do not have a choice as to where their inventory is stored or moved to.  Amazon has distribution centers in a number of states, including: Arizona, California, Connecticut, Delaware, Florida, Georgia, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin.

Amazon does not offer any assistance dealing with sales tax, except for calculating tax on behalf of sellers in accordance with their instructions. These instructions vary depending on where the seller is registered and the tax laws in each state.  If your business is an FBA seller, than you may sales & use tax exposure in a number of states and should consider your options to mitigate potential liability before the dollars become significant. 

If you have any questions about this or other SALT issues, please email Tom Mazurek at .  For additional State and Local Tax insights and resources, or to subscribe to our quarterly newsletter, visit tsacpa.com.

States are aggressively looking for taxpayers that are doing business in their state and not filing returns. Rather than wait until your company receives a state tax notice, we recommend that you proactively look at where your company may have state tax return filing requirements. Once a state has contacted you or determined you have nexus, the chances of negotiating a favorable outcome are greatly reduced. If a state has determined your company has nexus, the state has the right to request tax returns back to the date you began doing business in the state. This can be quite costly, not only in taxes, but also time spent resolving the matter.

For example, ABC Company has been selling products in State Z for 10 years and never filed sales tax returns. State Z determines ABC Company has nexus for sales tax purposes. State Z can request sales tax returns for the past 10 years (practically speaking most states will go back 6 to 8 years). Assume ABC Company had annual sales of $50,000 a year in State Z. ABC Company could owe $40,000 or more in sales tax, penalties and interest. This amount could have been reduced to less than half that amount had the company identified and addressed the matter proactively.

To reduce or prevent the risk of state tax underpayments, it is important to consider your company is doing business in other states. Start by asking yourself the following questions:

• Do we have sales in other states?
• Do we have locations in other states?
• Do we have employees or representatives that are residents of other states or making sales calls in other states?
• Do we send employees or subcontractors to make repairs or perform installations in other states?
• Do we have inventory, equipment or other assets in other states? If you are selling through Amazon’s “Fulfilment by Amazon” program, you likely have nexus in multiple states because your inventory could be held in Amazon fulfillment centers across the country.

If you answered yes to any of the above questions, your company should consider conducting a nexus study. A nexus study is a detailed review of sales and business activities by state to identify and quantify the risk of tax underpayment. Once nexus with a state is determined, a proactive plan can be put in place to reduce the risk of potential unreported liability. Does your company have a policy for maintaining exempt sale documentation? When is the last time anyone has reviewed your company’s resale and exempt sale documentation? Most taxpayers look at their exempt sale documentation the week before the sales tax auditor is scheduled to arrive.

If you have any questions about this or other SALT issues, please email Andy Toth at . For additional State and Local Tax insights and resources, or to subscribe to our quarterly newsletter, visit tsacpa.com.

A current prevailing view amongst the states is that their nexus rules, which determine when an out-of-state company is subject to taxation, have not kept pace with the economic realities of how companies conduct business across state lines.  To combat this, several states are moving away from the constitutional requirement to have a physical presence in order to create nexus by imposing new “economic nexus” standards.  One of the more common variations on economic nexus is the “factor-based nexus standard” being imposed by various states.  Under a factor-based nexus standard, nexus is created with a state when a minimum amount of property, payroll or sales is sourced to the state.

Nexus thresholds for states with a factor-based nexus standard for corporate income tax include:

• Alabama – greater than $50,000 of property or payroll; or greater than $500,000 of receipts; or greater than 25% of total property, payroll or receipts.
• California – greater than $53,644 of property or payroll; or greater than $536,446 of receipts; or greater than 25% of total property, payroll or receipts.
• Colorado – greater than $50,000 of property or payroll; or greater than $500,000 of receipts; or greater than 25% of total property, payroll or receipts.
• Connecticut – $500,000 or more of receipts.
• New York – $1,000,000 or more of receipts.  A recent revision to New York’s draft regulation on nexus (see draft Regulation Section 1-3.2(f)) indicates that each corporate partner or corporate member of a LLC taxed as a partnership, may be required to include 100% of the partnership or LLC’s receipts in determining if the $1,000,000 receipts threshold has been met by the corporate partner or member regardless of the percentage of ownership interest.
• Tennessee – equal to or greater than $50,000 of property or payroll; or greater than $500,000 of receipts; or greater than 25% of total property, payroll or receipts.
• Virginia – any positive applicable apportionment factor percentage.

Having nexus from in-state property or payroll (in-state physical presence) should not be a surprise.

However, companies are getting caught off-guard when they have no physical presence in a state but have exceeded the factor-based nexus standard threshold for in-state receipts shown above.   In-state receipts can come from shipping tangible property into the state or from performing services to customers located in a state if the state sources service receipts on a market-based approach rather than based upon where the costs are incurred to provide the services.  Alabama, California, Connecticut (new for tax years beginning after 2015) and New York (new for tax years beginning after 2014) all use the market-based approach for sourcing service receipts.

In these states, companies performing services may erroneously believe they have no receipts in states where their customers are located when all of their costs are incurred at their place of operations.  For companies selling tangible personal property, it may be possible to avoid corporate income tax nexus via PL 86-272 (mere solicitation exemption), however, this will not apply to protect against non-income based taxes nor will it protect companies that perform services.

Companies with customers in factor-based nexus states need to keep track of their in-state activities taking into consideration the bright-line nexus thresholds and receipts sourcing rules utilized by these states.

If you have any questions about this or other SALT issues, please email Bob Lamb at .  For additional State and Local Tax insights and resources, or to sign up for our free newsletter, visit tsacpa.com.

Now is the perfect time to determine whether your business is in compliance with the state and local tax laws of the jurisdictions where you are selling your goods and services. This may be the last thing you are thinking about or want to be thinking about right now, but given the current tax climate – states are aggressively expanding filing requirements, looking to broadening the tax base and stepping up audit efforts – it is critical to know where you have exposure. By reviewing the following areas now, you can take the necessary steps to manage your state and local tax risk and minimize this exposure, before things spins out of control.

Nexus

Identifying where your company is “doing business” is critical to determining its filing responsibilities for state and local tax purposes. Nexus is the minimum connection or link between your company and a state seeking to tax your company. This minimum connection is typically established by having a physical presence in a state, such as owning or leasing property…offices, a warehouse or distribution center or a manufacturing facility. However, nexus can also be established by just the presence of employees, independent contractors and/or other affiliates who are soliciting sales or performing services (i.e., installation, repair, maintenance, consulting, etc.) on behalf of the company.

In recent years, states have been aggressively moving to expand the scope of their nexus provisions, in order to require more out-of-state companies to register and collect/pay taxes on their sales and other business activities. Many states believe that simply having an economic presence within their borders is sufficient to establish nexus for income tax purposes, while other states are passing tax laws based on alternative theories that stretch the meaning of physical presence and seek to create nexus based on your connection with people and other companies within their jurisdiction. Unfortunately, each state has varying standards or tests for determining nexus, which are typically different depending on the type of tax in question…income tax, sales & use tax, property tax, etc., making this an especially difficult issue to navigate and address.

Compliance

In addition to determining where else you should be registered and filing tax returns, you need to be concerned with the returns you are already filing in various state and local jurisdictions across the country. Your company may have monthly, quarterly, semi-annual or annual filing requirements for sales & use, income/franchise, gross receipts, licensing, excise, payroll and/or property tax purposes that require an extensive amount of data and other information that needs to be generated and prepared by your financial reporting system and your employees. Who is making sure that the data being used is correct and reconciles to your books and records, that your employees are preparing the returns correctly, and that the returns are being filed and your taxes are being paid in a timely manner?

Aside from the procedural aspects of the compliance process, is your company following the tax laws of the state or locality in which you are filing? Are you charging tax on your sales correctly or sourcing your revenue or income according to the state’s rules or taking advantage of exemptions or credits that might be applicable to your business. Not having an understanding of the tax laws of a state in which you’re filing returns, can lead to potential liabilities or missing opportunities to reduce the amount of tax your company is paying. If the first indication that your tax compliance process is not working is a large tax assessment from a state due to calculating your tax due on sales incorrectly or having your CFO ask you to explain why he and the CEO received tax liens from a state due to the non-filing or non-payment of tax returns, your problems are just beginning.

Audit Readiness

Finally, you need to prepare yourself for the inevitable fact, that at some point, your company will be audited for state and local tax purposes. States are desperately trying to close budget gaps and looking to generate additional revenue to fund their programs, and audits are one way to accomplish this. Audits are not fun, but they shouldn’t keep you up at night either, as long as you are organized and prepared for the auditors, their information requests and sometimes endless questions. One of the ways to do this is to verify that you have proper documentation (exemption or resale certificates) to substantiate non-taxable sales. Another way is to review the supporting documentation for your tax returns to determine that it is complete and actually reconciles to your financial reporting system. Know where you may have taken an aggressive position on a return and prepare your arguments to support that position and likewise know where you may have the opportunity to utilize refunds or credits to offset any tax that maybe assessed.

Most importantly, know when it is time to consult a third party who may more experience than you or your employees in a particular tax or potential issue. The last thing you want to do is let an auditor discover a large deficiency and not be able to explain what happened or try to haphazardly explain the matter. This will not only hurt your relationship with the auditor but will lead to mistrust and doubt about the company’s business activities.

The steps described above may not be easy and may require some research, discussions with sales, IT and accounting personnel and an extensive review of a large number of tax returns and related information to determine whether your company is sufficiently in compliance with state and local tax laws. However, given the nature of the economy today and the aggressiveness of state and local tax auditors, how can you not take the time to assess your potential exposure and address the financial implications and risk of noncompliance?

If you have any questions about this or other SALT issues, please email Tom Mazurek at .  For additional State and Local Tax insights and resources, or to subscribe to our quarterly newsletter, visit tsacpa.com.