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Sales Tax and Interstate Business Transactions

By GREG BARBISH, CPA

One of the benefits of having a business in Delaware is the absence of a state sales tax. Customers can save money by driving across state lines to patronize your business, and you don’t have to track collections and make regular payments to the state. Yes, but …

Few companies today can thrive with a Delaware-only model and the omnipresent Internet makes interstate transactions inevitable for almost every business. And with those transactions come sales tax headaches.

If you haven’t heard about nexus, it’s time to learn. If you know about nexus, consider a refresher course.

“Nexus” is a Latin word for “connection,” and the question, as it relates to sales tax, is whether your business has a sufficient connection with another state to require you to comply with its sales tax laws.

If you open a warehouse in another state or have employees working in an office (even their home office) in another state, you most likely have established a nexus that requires you to collect sales tax from customers in that state and to forward your collections to the appropriate taxing authorities before their collection deadlines. If you engage in online or telephone sales, and you ship to an out-of-state customer via the postal service or other common carrier, you probably will not have to worry about sales tax if you do not have a business presence in that state. However, if you use one of your own trucks to make the delivery, then you likely would have to collect and pay sales tax.

What makes the situation more complicated is that different states have different standards. State laws vary just as much as their tax rates. What constitutes nexus in Pennsylvania may not be the same as in New Jersey or Maryland. (In some states, simply participating in a single trade show might be enough to meet its nexus standard.) In addition, cities and counties in some states impose their own sales taxes on top of the state’s levy, adding another layer of complexity to your bookkeeping. Furthermore, in some jurisdictions, different types of products are taxed at different rates, or not at all. (And Delaware does have a gross receipts tax that businesses must pay quarterly. It is based on sales, but is not collected from customers. It is just paid by the company.)

With most state governments facing severe budget pressures, it is reasonable to expect their tax-collection authorities to monitor, to the best of their ability, sales tax revenue streams, since this can account for a significant portion of a state’s income. Some states are bulking up their auditing teams to help uncover incidences of tax avoidance.

Given the complexities of the situation and indications of increased enforcement in some states, it is a good idea for any company that does business in more than one state to work with its tax professional or Certified Public Accountant on a nexus study – determining in which jurisdictions it is liable for compliance with sales tax laws, and other taxes as well.

To prepare for a nexus study, the business should know whether it has sales personnel or employees permanently located in another state, whether its sales people travel to other states to solicit business, how the company delivers its products to destinations in other states, whether it has a warehouse or other property (either leased or owned) in another state, and whether its employees or independent contractors complete installations, repairs or training in another state. The business should also know who determines whether its sales are taxable, and whether items are separately identified on invoices. The business should also be prepared to provide its tax advisor or accountant with details on how it collects and remits local taxes, how it reports sales, whether it has exemption certificates from other states and how it keeps tracks of sales tax rates in other jurisdictions.

With this information in hand, an accountant or tax professional can advise management about the company’s responsibilities for tax compliance, including a schedule of what tax forms have to be filed and when.

There is, of course, always the possibility that a nexus study will reveal that a business has slipped up and neglected to collect and make payments to one or more jurisdictions. While that is not a pleasant finding, it is almost always preferable to clear up the matter by making payments before being charged interest and penalties on whatever is due.

We accountants are used to hearing business owners complain about taxes being onerous, but there is a bright side to assessing your nexus obligations. If you’re doing business in more and more states every year, chances are your business is doing fairly well.