Sales Tax – What You Didn’t Know

In a previous article, I discussed how hidden traps in your business plan can create some fairly serious sales and use tax issues for your company.  Let’s continue along the same lines and I will elaborate on the concept of nexus and some more obscure ways that a company can create nexus with any given state or local government.

The first of these topics is something that most businesses do every day without a second thought: sales representatives or other company representatives travelling to meet with customers.  We know that when it comes to serving our customers, sometimes it requires a personal on-site visit to resolve problems.  Furthermore, enterprise customers may receive a personal visit more frequently during the year to keep their account on good terms.

So, the question is: Does this create nexus for my company?  The simple answer is that it may indeed create nexus for your business.  Some states have laws on the books that only allow for company representatives to travel into the state a certain number of times per year.  If you exceed that number, you have likely created nexus.  For example, the State of Michigan will only allow company representatives to enter the state three times a year before they create nexus.

If I were to ask how many of you attend trade shows each year to either further your education in your industry or to promote your company in other ways, most of you would probably say that your company does indeed attend trade shows.  Here is yet another way that you can create nexus for your business.  This simple act of attending a trade show in any given state may create nexus for your business.  While some states will allow businesses to attend any number of trade shows in their state without creating nexus, there are definitely some out there that are not so lenient.  For example, the State of Hawaii indicates that the mere attendance at one trade show to promote your business is sufficient activity to create nexus.

In both of these examples, what the states are trying to put forth is the concept of creating a marketplace in their state.  In almost all states, there is this one catch all for nexus:  if the state determines that any company representative is actively engaged in creating a marketplace in a state where they visit, then chances are that you have created nexus.

Finally, there is one other tricky way that your company can create nexus with a given tax authority:  consigned or leased inventory.  Many businesses are in the habit of shipping inventory to retailers who will sell it on to the final consumer but the business keeps the title of the goods until final sale.  This is known as consigned inventory.  The same is true with leased equipment where the equipment remains the property of the lessor.  The issue here is a little more straight-forward, however.  In both of these cases, your business actually has tangible property located in a state where you may have no other presence.  Physical presence in any state will create nexus for your business.  Even if the property is only temporarily located in the state.

The myriad of ways that a company creates nexus continues to grow as state and local governments look to out-of-state businesses to help supplement their sales tax revenue stream.  It is imperative that tax departments stay on top of their business plan to be aware of areas where you may be creating nexus.  It is equally imperative to consider how the business operates in the states where customers reside to ensure that the business is correctly applying to collect and remit sales and use tax.

To stay up to date on sales and use tax trends, subscribe to Wolters Kluwer Intelligence for Taxation.

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Cory Barwick

All stories by: Cory Barwick