Nexus Issues You Need to Understand
CCH experts share the latest ways states are expanding nexus for sales tax purposes
| July 2012
States seeking opportunities to enhance revenues are aggressively trying to expand the definition of nexus to maximize sales tax collection. In a recent webinar hosted by Business Finance magazine, Connie Eisenberg, CCH Senior Editor, General Sales and Use Tax, and David J. Rubenstein, CPA, CCH Manager of Corporate Professional Services, Telecommunications and Utility Tax, explored the trends in determining nexus and their implications. Here are some of their main points:
1. Some states define the "regular presence" necessary to create nexus to mean as little as two days a year. Exhibiting or taking orders at a trade show can be enough, although simply attending a show is not. The work in question must relate to establishing or maintaining a market, but that definition varies among states. For example, Indiana says home-based sales reps do not create nexus as long as they don't sell to Indiana customers, but New Mexico says independent contractors who develop business contacts do create nexus.
2. In general, courts are interpreting "establishing and maintaining a market" broadly. Many consider in-state businesses and even nonbusiness parties active representatives of out-of-state businesses.
3. States differ when it comes to online businesses. One state may say an online business has no nexus with its brick-and-mortar siblings, while another state may establish nexus between the two because they share a trademark. Amazon is arguing in several states that having warehouse operations in a state is distribution, not sales, and therefore creates no nexus.
In May 2012, an Illinois court ruled that state's "click-through" law, which creates nexus for online sales based on having in-state affiliates, was an unconstitutional expansion of the definition of "maintaining a place of business." In other states with similar laws, some companies selling online have dropped their affiliate relationships in those states while arguing against the laws in court. No affiliate cases are settled.
4. Use tax reporting may become a requirement. In March 2012, a U.S. District Court struck down as unconstitutional a Colorado law requiring use tax reporting. The case is under appeal.
5. Some courts have found that unrelated businesses establish nexus by enabling the out-of-state company's work. For example, a Virginia company created nexus in Illinois by hiring an answering service there to take orders.
6. The major legal argument around nexus is whether states are impermissibly regulating interstate commerce. Three federal laws have been proposed to standardize sales tax laws. “If any law passes at the federal level,” Eisenberg says, "everything we know about nexus goes out the window."
Find out more about nexus by watching the free CCH-sponsored webinar.