Tiptoeing through the Nexus Minefield

By Klein, Mark S.; Noonan, Timothy P. et al. | The CPA Journal, January 2001 | Go to article overview

Tiptoeing through the Nexus Minefield


Klein, Mark S., Noonan, Timothy P., Sabol, Andrew B., The CPA Journal


IN BRIEF

Trying to Have Their Coke and Eat It Too

Traditional businesses have long envied the taxfree advantages enjoyed by dot-com retailers. Though consumers may believe that the Internet is a tax-free zone, e-tailers are only spared the burden of state sales tax collection where they have no nexus that would subject them to the consumer's state tax jurisdiction. The nexus rules, however, are not quite cut and dry.

Although many brick-and-mortar retailer have formed e-tailer subsidiaries to reap the benefits of e-commerce, the authors point out that many companies have ignored alter ego and agency considerations, creating the possibility that the nexus of the parent will be attributed to the subsidiaries. Avoiding attributional nexus requires the companies to be distinct entities: They should avoid common officers and personnel, eschew joint promotion and advertising, and sell different products. It is also essential to keep customer service activities separate and maintain arm's-length pricing for any licensing agreements. If a careful division is maintained, the companies can enjoy the benefits of click-and-mortar operations while avoiding the dangers of the nexus minefield.

The bane of Main Street businesses, "e-tailers" enjoy the luxury of being able to sell to customers across the country (and the world) without the burden of collecting sales tax in every jurisdiction. By limiting their physical presence to one or two states, they effectively limit their sales tax collection responsibility to those states, giving them a competitive edge over traditional "brick-and-mortar" retailers. After years of howling over this inequity, many traditional retailers have decided that they'd rather switch than fight: Wal-Mart, Kmart, and Borders have all recently unveiled e-tailing operations.

But the megaretailers have a problem that pure e-tailers do not: Their brick-and-mortar operations give them nexus in most states and they are required to collect sales tax on their Internet sales in those states. The retailers' dilemma is compounded by the fact that consumers have come to expect all Internet sales to be tax-free (ignoring or forgetting that they are responsible for any applicable use taxes on such transactions).

Consumer expectations and increased competition have led many of the new "click-and-mortar" retailers to try to structure their way around collecting sales taxes. Many have broken their new e-tailing units out into separate subsidiaries or affiliates with a limited physical presence. The traditional retailer naturally wants to capitalize on its goodwill and name recognition, and therein lies the problem: If the retailer/e-tailer relationship is too seamless, there is a very real danger that states will treat the two entities as one for nexus purposes.

The new breed of click-and-mortar retailers must consider how much integration will be acceptable to taxing authorities. But where to draw the line? The authors' review of various websites indicates that many retailers may not understand the significance of this decision. Although the names have been changed, the problems presented in the following case study are real. Retailers should be warned that it was not difficult to find the incriminating evidence, and more likely than not the state tax auditors are not far behind. The stakes are high and the rules are anything but clear.

Cage Study

Retailer Inc. maintains retail outlets throughout the continental United States and has been an industry giant in the computer hardware business for the last decade. Retailer thought it especially important to establish a website, which it used to market, support, and sell its products. After the initial fanfare, however, sales from Retailer's website began to decline. Many of its customers complained about having to pay sales tax, believing that Internet sales were tax-free. Other customers didn't complain; they simply took their business to Retailer's biggest competitor, a pure e-tailer that only collected tax in the two states where it had a physical presence.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Tiptoeing through the Nexus Minefield
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.