Multistate Tax-Nexus


Nexus, also called “sufficient physical presence”, is a legal term that refers to the requirement for companies doing business in a state to collect, report, and pay sales taxes on items they sell, which the state lists as taxable in that state (AICPA, 2014). For example, according to Texas law, if a person sells goods or services in Dallas, he must collect sales tax from your customers, then report to the state and pay the amount collected.

First, a company must determine if it has a sales tax nexus. Sales tax nexus occurs when business has connection to a state. All states have a slightly different definition of nexus, but most of the states consider a “physical presence” to create nexus. To qualify for physical presence is to have any one of the listed requirements:

  • An office

  • An employee

  • A warehouse

  • An affiliate

  • Stored inventory

  • Physical business in a state for a limited amount of time: a trade show or craft fair (Mark, 2015)

Second, a company needs to register for a sales tax permit. Head over to the state’s taxing authority and register for a sales tax permit before collecting sales tax from buyers (Katherine, 2016). It is required to register for a sales tax permit in each state where the business has nexus, and it is important to have this permit to protect oneself from legal liabilities (Katherine, 2016). Collecting without a permit is collecting sales tax in the state’s name, but putting it in your own pocket. This can lead to big penalties or even jail time in extreme cases.

With a registration number a businessman is eligible for a sales tax filing frequency; generally are assigned to file either monthly, quarterly or annually (AICPA, 2014). The frequency is based on expected sales volume in that state.

The final step is to collect sales tax. With sales tax nexus in a state, collection of sales tax from buyers in that state is required. Sales tax rates will vary from locality to locality. This means a company must determine the sales tax rate in that state, plus any local sales tax that might apply. If the business has stores in multiple states, it may have sales tax obligations in each location. Nexus can be created by employing salespeople who work in other states (TaxJar, 2017). For example, if a company’s employees or contractors conduct any work at a customer’s out-of-state location, this company may have nexus there as well. Examples of Nexus jurisdictions: A company with nexus in Plano, Texas, would select the following:

  • Texas in State Jurisdictions (6.25%)

  • Collin in County Jurisdictions (0%)

  • Plano in Local Jurisdictions (1%)

  • District (1%)

Collecting sales tax from buyers in every state where a company has sales tax nexus is important. Food, clothes, and supplements often considered non-taxable in many states. If a company is selling a non- taxable item to a customer, it does not need to charge sales tax.

Penalties:Various penalties apply for late filing of sales tax reports, failure to file the sales tax report, failure to pay and under-reporting. Check with your state for the applicable penalties.

References:

AICPA Tax Section. (2014). AICPA STATE TAX NEXUS GUIDE. Retrieved February 28, 2017 from http://www.aicpa.org/membership/downloadabledocuments/sample_files_/taxsection/sample-2014-state-tax-20nexus-guide.pdf

EHTC. (2017). Nexus Studies. Retrieved February 28,2017 from http://cdn2.hubspot.net/hub/49708/file-2843459226-pdf/docs/salt-services-if-nexus-studies.pdf?t=1440095618748

Faggiano, Mark. (2015, August 18). Sales Tax Nexus Definition. Retrieved February 13, 2017 from http://blog.taxjar.com/sales-tax-nexus-definition/

Hegar, Glenn. (July, 2015). Taxable Services. Texas Comptroller of Public Accounts. Retrieved from https://conroeisd.net/wp-content/uploads/2016/11/Taxable-Services.pdf

Mia Yu-Master's Degree in Accounting Student at Naveen Jindal School of Management

Staff Accountant IAA CPA FIRM PLLC

This information is for educational purposes, its not a substitute for consultation with a tax practitioner.If you have any questions,please contact IAA CPA FIRM PLLC


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