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Out-of-State Workers and/or Sales May Trigger State Nexus Laws

 

Does your company conduct sales in states in which you are not registered or in which you have not filed sales and use tax returns? Does your company ship goods or provide services to customers located in states where you have little or no in-state physical presence? Do you have remote employees working in other states in which you do not operate?  

Regardless of how remote your company is, it could have a footprint in a state that generates “nexus” in that jurisdiction. No matter how small or whatever your base of operations is, your company is liable for collecting and remitting tax on sales in a state if your company has nexus in that state. In addition, remote workers may trigger corporate income tax nexus.  It sounds complicated, and it can be. Here's more information to help better understand this requirement.

What is a nexus?

Basically, nexus is the means used by states to determine whether your company’s presence in a state generates the requirement to collect and remit sales taxes on sales to consumers in that state. The nexus rules vary state-by-state and have many differing factors that are measured to make the determination, including property, payroll, or sales. The two most common nexus standards are the physical presence standard and the economic presence standard.

Physical presence standard?

Nexus through the physical presence standard is generated when a company maintains either temporary or permanent presence in a state. Generally, this measure of nexus is determined by evaluating if the company has any assets or employees, independent agents or service professionals in the jurisdiction. Also, under this standard, assets such as inventory, offices, or warehouses (owned or rented) can also create a nexus.

Temporary or permanent?

So what does it mean when the regulations say this presence is either temporary or permanent? It can be confusing when describing something as temporary. Generally, this refers to short-term presence, like a trade show or a sales meeting versus having a long-term employee or office in a state.

The pandemic has also raised questions for employers who may have employees temporarily working remote in a state in which the company may not operate. Some states have issued specific guidance regarding income tax nexus for COVID impacted remote employees.

Property or people?

As we established, generally, the physical presence nexus standard is met by either having people or property in a state. For example, when a Michigan-based company sends a team of employees for a trade show in Florida, you may be creating a nexus that will affect the company’s requirement to collect and remit sales tax in Florida going forward. However, the requirements and measurements are different from state to state, making the process very confusing.

Economic presence standard?

Prior to the pandemic, this nexus standard was most prevalent with online retailers or remote sellers. A majority of states have passed the new economic nexus standards that may require businesses that conduct sales into states that they do not have a physical presence to also be subject to the state’s sales tax collection and remittance rules. Under this new standard, merely having a large volume or quantity of sales into a state is enough to generate nexus.

How can you find help?

There is nothing simple about this process, and with all the different requirements throughout the country, it can be frustrating to try to determine what does and doesn't apply to your business. We can help you determine if your business has triggered the various nexus laws and process the numbers and requirements to get you into compliance.

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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