The reach of state taxation greatly broadened on June 21, 2018. On that day, the Supreme Court upheld South Dakota’s “economic nexus” standard in South Dakota v. Wayfair. The court gave the green light for South Dakota’s imposition of a sales tax on an out-of-state seller, even though the seller did not have a physical presence in the state. Today’s post outlines some basics of nexus and Business Activity (Nexus) Questionnaires that states send out to potential taxpayers.
What is Nexus?
The Wayfair ruling paves the way for states to enforce economic nexus standards on businesses throughout the country, increasing their revenue coffers. Nexus defines the level of connection between a business and a state or local tax jurisdiction, whether the business is located in the state or not. If a state can substantiate that a business has nexus, then the state may be able to impose a tax, or multiple taxes, on the business.
Examples of what may cause nexus from a physical presence in a state:
- Owning or renting office space, warehouse or equipment
- Storing inventory
- Employees who work in the state (temporary or permanent)
Examples of what may cause economic nexus without physical presence in a state:
- Gross receipts derived from a state
- Number of transactions derived from a state
The Wayfair case has ramifications for sales tax collection and states have quickly addressed their economic nexus standards. States vary in what creates economic nexus, which can complicate determining where a business should file.
What tools do states use to determine nexus?
State taxing authorities primarily use Business Activity/Nexus Questionnaires to assess if a business has nexus in their state. The questions help identify the activities a potential taxpayer has in a state. Here is an example of a questionnaire from the Pennsylvania Department of Revenue.
What does this mean for your business?
These questionnaires may appear simple, but don’t mistake its simplicity or vagueness for a lack of importance. Some questions may be open ended; some may be true or false. Responding to a question without knowing the intention behind it could lead a business to be construed as having nexus and, therefore, open to taxation. Failure to respond may cause a state to unilaterally levy a tax. If the tax is levied incorrectly, the business now must engage the state and its ubiquitous red tape to disprove nexus.
What to do next?
If you have received a nexus questionnaire, we recommend contacting your tax advisor for assistance before responding.
If you think you have a tax obligation and have not yet been contacted by a taxing authority, there may be some relief available. Many states offer voluntary disclosure programs, which is a proactive approach a business can take towards becoming compliant.
To be eligible for a voluntary disclosure program, typically, a business must not have been contacted by a state or had any prior registrations or filings with a state to be approved for inclusion in a voluntary disclosure program. If approved, a business can file prior-period returns with the potential for penalties being waived. In addition, a voluntary disclosure program will usually limit the number of prior years that must be filed.
Who can help?
The Tax Warriors® at Drucker & Scaccetti have decades of experience working with state and local taxing authorities. With what’s at stake, it’s important to work with experts. Contact us if you need assistance. We can help identify any tax filing requirements in states where your company conducts business.