With budget pressures mounting and an unwavering opposition to increasing tax rates, state governments are looking into alternative methods of raising tax revenue. A growing solution among states is to modify and expand current nexus laws. By changing the current laws, states are hoping to capture untapped revenue streams.
Historical Sales Tax Nexus Laws
- “Nexus” is the connection a business has to a state that requires it to collect/remit sales taxes.
- Traditionally, courts have required a physical presence (property, employees, or agents) to have sales tax nexus.
States are Shifting Away from Traditional Nexus
- In our growing e-commerce economy, some states have created “click-through” nexus laws (or “Amazon.com” laws). The Amazon laws now give rise to indirect physical nexus. An out of state retailer that is connected through commission agreements with an in-state online retailer will now be physically connected to the state and subject to the sales/ use tax regime.
- Also, “agency” nexus may exist and a company may be required to collect/remit sales and use tax if it contracts exclusively with a company within the state to perform ancillary tasks on its behalf, such as marketing, shipping, or distribution within that state.
How this Relates to You
- Sales tax collections are the largest revenue generator for most states and state governments are facing large budget deficits.
- Rather than using random selection for sales and use tax audits, states are using predictive software similar to the Discriminant Index Function System used by the IRS. Based on a variety of characteristics such as industry, sales, and employees, a business can find itself having more audits that it had in the past.
If you have any questions regarding state nexus laws or believe you may have state nexus issues, please contact your PKF Tax Advisor.