Grow Your Business Potential, Not Your Exposure!
One of the most important topics in sales and use tax is the concept of nexus. Simply put, nexus is the connection between a business and state(s) that can require the business to collect and remit sales and/or use tax. There are many different ways that a business can establish nexus, but one that is often overlooked is the language used in the writing of a business plan. Yes, that thing that guides every principal of a business may contain hidden traps requiring it to report tax in the states that they operate.
A company’s business plan includes, among other things, a good description of how the company will bring its goods and/or services to market. It also outlines the objectives of the company to diversify its offering of goods or services, expand operations into new regions, or add to infrastructure in the coming years. It provides the sales team with something to rely on when telling customers what to expect about the buying experience. Understanding these key elements of planning is vital to recognizing how a company will be impacted by sales tax reporting requirements down the road.
Let’s use Company XYZ as an example. They are based in Nevada and sell software. Part of that sale includes a maintenance agreement, as stated in their business plan.
“…We will operate a local warehouse in any state that we ship to…”
Let’s first look at how businesses bring goods and services to market. If Company XYZ sells goods in Nevada and has any sort of physical presence in Nevada, they will be required to collect and remit tax. Even if Company XYZ’s business plan only requires that they have a local warehouse for delivery of goods, they have created nexus. Similarly, if they have consigned inventory in Nevada, then their business has nexus with that state.
This rule is also applied to the service industry; businesses with a physical presence in a state are required to collect and remit tax. Additionally, a service provider needs to consider a couple of very important questions, including:
* Where are services performed?
* Do repair personnel travel to various states to perform services?
If the answer to these questions is “yes,” then it is very likely that the business has created sales tax nexus with that state.
“…We will employee work from home/telecommute employees …”
After looking at how businesses intend to bring good and services to market, businesses need to look at their employment practices. Today, individuals are employed in a myriad of different ways – from working in a traditional office setting; to working remotely; or to working from home. Working offsite and working from home pose an interesting question to employers: does an employee in another state create nexus? The answer to this question is a resounding ‘yes’. Having payroll in a state is the same as having a physical presence, and businesses must collect and remit sales and use tax in any state where they have an employee.
“…as we expand into new states…”
Next, does Company XYZ’s business plan target expansion of operations into new regions? Expansion into new states without first understanding the tax implications can create complications. Strictly from a perspective of creating nexus, expansion into new states may not necessarily create nexus for a business that provides goods only. If Company XYZ’s go-to-market plan only includes shipping goods via a common carrier such as FedEx® or UPS®, nexus will not be established. But if Company XYZ plans to deliver goods on trucks that they own, nexus will be created.
For a service provider, planning to expand into new states should be approached with some caution from a tax perspective. Providing any type of service directly in a state, gives a business nexus with that state. In the case of a service provider, expansion into new states necessarily means that the business has created a collection and reporting requirement. Remember, even if the services that Company XYZ provides are non-taxable, they may still have to report consumer’s use tax on goods that they consume in the normal course of providing services.
While guiding principles and business practices are both important concepts pulled from business plans, it is important to remember that tax implications are built into the very same language. A business plan will guide the business over the course of years to come, and that guidance should include clear understanding of tax planning and nexus.