Academic journal article Journal of Accountancy

Nexus for Sales and Use Taxes

Academic journal article Journal of Accountancy

Nexus for Sales and Use Taxes

Article excerpt

States have become more aggressive in claiming a seller has substantial nexus for sales and use tax purposes. They look for instate activities, relationships and assets of unregistered businesses with customers in the state. Here are some tips to help businesses determine their sales and use tax collection obligations:

* Review "physical presence" law. The 1992 U.S. Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298, held that a seller must have a physical presence in a state before the state can require sales tax collection. The types of physical presence that create nexus, however, vary from state to state. State statutes, regulations, tax agency rulings and court decisions should be reviewed regularly for developments. The AICPA offers a directory of Web links at www.aicpa.org/ yellow/yptstax.htm.

* Know where property is located. Verify the location of inventory, goods out on consignment, leased property, real property, equipment, computer servers and delivery trucks. Just about any property--perhaps even intangible property such as software--that a state may treat as tangible can create nexus.

* Know the whereabouts and activities of employees and representatives. Employees, independent contractors, agents or representatives in a state may create nexus, depending on the nature of the relationship and activities. Again, states vary as to definitions, exceptions, time limits and the types of activities the person or entity may engage in that create nexus. Generally, the activities must relate to sales. Some nexus rulings refer to Tyler Pipe Industries Inc. v. Washington Department of Revenue, 483 U.S. 232 (1987): "... the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales."

* Examine the nature of transactions and relationships in the state. Some states have broadened the types of relationships that can create nexus. For example, a few states, such as Arkansas, Idaho and Minnesota, provide that if a seller and in-state business have a specified relationship and the in-state business in some way promotes sales for the seller or has similar products or company name, the seller must collect sales tax. …

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