June 26, 2018
A sales tax Nexus occurs can be created if your company is determined to have enough of either a temporary or permanent presence in another state. The presence in that state will be the determining factor as to if an out-of-state business is required to collect sales taxes or if they must use taxes on sales into the state.
There are two ways a company's "presence" within a state is determined. One is by the people from or within your company that work in a state which includes employees or service people or even independent sales/service agents that represent or work for your company. The second way to measure a company's presence in the state is through the amount of property that company has in that state. Property will include things like inventory, offices, warehouses, stores, or even production locations that lie within that state's borders.
The state of a Nexus is created once a certain business is established within a new state. Each state will have different requirements before a Nexus is established. There is no one-size-fits-all when it comes to the presence required in that state to allow a Nexus to form. This presence threshold being reached by a company is the point at which the state is given the right to collect sales taxes on everything that that company sells.
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Presented by Jennifer A. Driskill CPA, M.B.A.
How Are Nexuses Established & Determined?
While each state has their own minimum threshold requirements for the required size of a company's presence in a state before a Nexus status is reached regarding sales taxes. However, the concept of a Nexus originally first is controlled by the US Constitution and is located under the Due Process Clause and the Commerce Clause. The United States Supreme Court further interprets these laws at various levels over time based on the history of US sales taxes and revenue. They will continue to interpret these laws as we move forward and times change.
Landmark Ruling On Nexus Establishment Laws On Internet Sales:
Recently, another landmark ruling was made by the Supreme Court in the South Dakota vs. Wayfair permitting online and other remote sellers are required to have a permit to conduct business online, which will allow the state to track who is selling product. The states then will each be allowed to determine if sellers without a physical presence in their state will be required to pay sales taxes on the goods and services they sell to people in their state. The decision was passed by the Supreme Court narrowly with a 5-4 vote in favor of allowing this law to pass.
It is believed that many states will move quickly to put laws into place that allow them to capture this additional sales taxes. This case was created when a company called Wayfair decided to challenge the State of South Dakota on a law that required any entity conducting business within the state that does a minimum of $100,000 in sales or has 200 transactions in a given year to pay sales tax.
This case went all the way to the Supreme Court who sided with the state. This means that previous Nexus rules have been replaced and now companies that are present in a state only through online sales must collect and pay the state sales taxes on the products sold once they reach a specified threshold of sales. This means that a company no longer has to be a physical presence within a state to be required to pay sales taxes on the product sold.
For example, this now means that any business within the state of South Dakota (whether they sell online or have a physical presence in the state) are required to pay sales taxes according to the laws set forth by that state. In South Dakota, this means that whether a business physically does business in the specified state or if they do their business all online, they must pay the sales taxes if they reach that state's specified sales or transaction thresh hold.
Supreme Court Protects State's Rights To Collect Sales Taxes:
Along with this latest landmark ruling in the South Dakota vs. Wayfair case, the Supreme Court has ruled that all companies doing business within a state, whether it's in a physical location within the state or over the internet, must follow the company's sales tax laws. This means that many companies will have upgrade their billing systems and software to be sure they are charging the appropriate sales tax when doing transactions in other states. Businesses will also have to educate their sales representatives and financial employees as to what the rules are regarding sales taxes and the thresh holds for sales at they must start paying sales taxes in each individual state in which they do business.
Many companies that do business online will have to pay state taxes based on the addresses of people who are purchasing their products or services. If someone lives in a certain state, that means that those sales must count towards the total sales that have been done in that state during a specific year. Most states will require sales taxes to be paid if a single business entity has done more than $500,000 worth of business in their state within a given year.
However, some states may require sales taxes to be paid before that point. It's the responsibility of each company to understand the sales tax laws in each state and being collecting those taxes to pay the state taxes when that thresh hold or number or business-related sales transactions has taken place during that given year. Educating your employees on theses standards for each state in which your company does business (whether its a physical presence or online) will help ensure that your company is in good standing with the sales taxes that you owe for the business that you do in that state.
For more information on how to educate your employees about the new Supreme Court ruling in the South Dakota vs. Wayfair and how it may impact your business and paying your sales taxes please feel free to contact us.
Sources:
https://www.thebalancesmb.com/what-is-a-tax-nexus-398356
https://spectator.org/the-supreme-court-just-gave-states-more-tax-power/
https://www.accountingtoday.com/opinion/supreme-court-abandons-physical-presence-standard-in-south-dakota-v-wayfair