Article
Navigating State Tax Nexus Expansion to Ensure Compliance
The state tax arena is fraught with variation, complexity, confusion, and ambiguity. To add madness to this mayhem, states lack uniformity in their interpretation and application of overarching taxation principles. The variety of tax laws amongst the states creates problems for practitioners and corporate taxpayers trying to comply with tax rules. This complexity doesn’t just make compliance difficult; it can prevent multistate taxpayers from completing state tax planning.
Additionally, states’ views of their own jurisdiction to tax out-of-state companies have continued to broaden since the South Dakota v. Wayfair Supreme Court decision in 2018 overturned the physical presence requirement for sales and use tax nexus. This has created even more complication and increased the potential for tax exposure for multistate taxpayers, making it essential for tax practitioners to plan a corporate tax strategy that ensures compliance and reduces risk.
[Download a Summary of States’ Wayfair and Marketplace Implementation for a top-line comparison of the current state economic nexus and marketplace facilitator thresholds.]
Multistate economic presence nexus thresholds
The ways that states calculate economic nexus are varied, and that alone creates complexity for taxpayers simply attempting to determine where they should be collecting and remitting sales tax. The sales and transactions that states use to determine economic nexus may or may not include wholesale sales, exempt sales, marketplace sales, and sales by affiliated entities. Or nexus might be based on sales up to $100,000 or more than $100,000, or based on a prior or current calendar year, or prior 12 consecutive months.
The differences between states’ tax rules create complexity even when dealing with what should otherwise be straightforward. Research into relatively simple concepts such as what constitutes a tax year may take a lot of time and effort to answer because of the variability across state rules. These differences in state tax rules may even mean that a single transaction is treated differently in different taxing jurisdictions.
What’s the difference between physical presence and economic nexus?
Since the 2018 Supreme Court Wayfair decision allowed states to impose sales and use tax collection obligations on out-of-state taxpayers based on economic nexus, states and localities have become more emboldened about expanding their jurisdiction to tax multistate taxpayers in a variety of ways.
States are becoming more aggressive in their nexus determinations. More and more states are looking to pass the tax burden on to out-of-state companies and base nexus solely on sales into the state when the physical presence is slight. And now, with states broadly interpreting their economic nexus rules, remote businesses are more likely than ever to find that they have nexus in multiple states.
Does remote work create tax nexus?
On top of an already complex field, the global pandemic has drastically changed the way companies and tax departments conduct business, piling additional challenges and complexity onto already difficult corporate tax issues.
The continued prevalence of remote work has the potential to create nexus for unwitting taxpayers across states, thus making tax compliance even more difficult. While many states administratively waived nexus for telework during the worst of the pandemic, these administrative waivers have expired. As a result, taxpayers need to be aware that their remote work arrangements could likely create nexus for corporate income, franchise, sales, or gross receipt taxes.
Complicating matters, there may not yet be state guidance on how to deal with the continuing prevalence of telework.
What business activities create sales tax nexus in each state?
[Download a Summary of States’ Wayfair and Marketplace Implementation for a top-line comparison of the current state economic nexus and marketplace facilitator thresholds.]
Alabama
No response
Arizona
Business activities that create sales tax nexus in Arizona:
- Reimburses for home office
- Delivers merchandise
Arkansas
No response
California
Business activities that create sales tax nexus in California:
- Reimburses for home office
- Maintains a P.O. box – assuming the post office box is used for some type of selling activity such as receiving orders and that an in-state employee or representative processes the orders received in the post office box
- Stores inventory
- Delivers merchandise
Colorado
No Response
Connecticut
No Response
District of Columbia
Business activities that create sales tax nexus in District of Columbia:
- Reimburses for home office
- Maintains a bank account
- Maintains a P.O. box
- Local phone numbers
- 800 phone numbers
- Stores inventory
- One employee telecommutes from home doing back office functions
Florida
Business activities that create sales tax nexus in Florida:
- Delivers merchandise, determined on a case-by-case basis
- Delivers in returnable containers, determined on a case-by-case basis
Georgia
No Response
Hawaii
Business activities that create sales tax nexus in Hawaii:
- Reimburses for home office
- Maintains a P.O. box
- Local phone numbers
- 800 phone numbers
- Stores inventory, depending on the situation
- Delivers merchandise
- Delivers in returnable containers, or if merchandise is delivered to customers in company-owned vehicles or by means other than common carrier or the U.S. Postal Service
Idaho
Business activities that create sales tax nexus in Idaho:
- Reimburses for home office
- Stores inventory
- Delivers merchandise
Illinois
Business activities that create sales tax nexus in Illinois:
- Reimbursement for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers, assuming the retailer maintains ownership of the containers
Indiana
Business activities that create sales tax nexus in Indiana:
- None, assuming salesperson does not engage in activities described in IC 6-2.5-2-1(c)
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers, assuming not delivered solely by common carrier
Iowa
No Response
Kansas
No Response
Kentucky
Business activities that create sales tax nexus in Kentucky:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
Louisiana
Business activities that create sales tax nexus in Louisiana:
- Reimburses for home office
- 800 phone numbers
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Maine
Business activities that create sales tax nexus in Maine:
- Reimburses for home office
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
Maryland
Business activities that create sales tax nexus in Maryland:
- Reimburses for home office
- Maintains a P.O. box
- 800 phone numbers – if the company also meets the requirements of COMAR 03.06.01.33
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers, if seller meets criteria of COMAR 03.06.01.33
Massachusetts
Business activities that create sales tax nexus in Massachusetts:
- Reimburses for home office (Internet sales may independently trigger sales tax nexus)
- Maintains bank account
- Maintains a P.O. box (Internet sales may independently trigger sales tax nexus)
- 800 phone numbers (Internet sales may independently trigger sales tax nexus)
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise (Internet sales may independently trigger sales nexus)
- Delivers in returnable containers (Internet sales may independently trigger sales nexus)
Michigan
Business activities that create sales tax nexus in Michigan:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Minnesota
Business activities that create sales tax nexus in Minnesota:
- Reimburses for home office – if they spend more than three days total within a 12-month period in the state for any combination of activities. Any sales made in Minnesota (product given to buyer) will be subject to MN tax whether or not the corporation has created nexus
- Maintains a P.O. box in certain situations
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers – if they spend more than three days total within a 12-month period in the state for any combination of activities. Any sales made in Minnesota (product given to buyer) will be subject to MN tax whether or not the corporation has created nexus
Mississippi
Business activities that create sales tax nexus in Mississippi:
- Reimburses for home office
- Stores inventory
Missouri
Business activities that create sales tax nexus in Missouri:
- Reimburses for home office
- Maintains a P.O. box
- Local phone numbers
- 800 phone numbers
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
Nebraska
Business activities that create sales tax nexus in Nebraska:
- Reimburses for home office
- Maintains bank account
- Maintains a P.O. box
- 800 phone numbers
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Nevada
Business activities that create sales tax nexus in Nevada:
- Reimburses for home office
- Maintains bank account
- Maintains a P.O. box
- Local phone numbers
- 800 phone numbers
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
New Jersey
Business activities that create sales tax nexus in New Jersey:
- Reimburses for home office
- Maintains a P.O. box
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
New Mexico
Business activities that create sales tax nexus in New Mexico:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
New York
No Response
North Carolina
Business activities that create sales tax nexus in North Carolina:
- Reimburses for home office
- Maintains a P.O. box
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers, if deliveries of items in returnable containers are made in the vendor’s company-owned vehicles
North Dakota
Business activities that create sales tax nexus in North Dakota:
- Reimburses for home office
- Maintains a P.O. box
- 800 phone numbers
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Ohio
Business activities that create sales tax nexus in Ohio:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers, if the representative or containers are in Ohio for more than seven days in a calendar year and the seller has more than $25,000 in Ohio sales in a calendar year
Oklahoma
Business activities that create sales tax nexus in Oklahoma:
- Reimburses for home office
- Stores inventory
- Delivers merchandise
Pennsylvania
Business activities that create sales tax nexus in Pennsylvania:
- Reimbursees for home office
- Maintains a P.O. box
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Rhode Island
Business activities that create sales tax nexus in Rhode Island:
- Reimburses for home office
- Maintains a bank account
- Maintains a P.O. box
- Local phone numbers
- 800 phone numbers
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
South Carolina
No Response
South Dakota
Business activities that create sales tax nexus in South Dakota:
- Reimburses for home office
- Maintains a P.O. box
- Local phone numbers
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Tennessee
Business activities that create sales tax nexus in Tennessee:
- Reimburses for home office
- Activities in connection with an in-state post office box may create nexus, but a P.O. box on its own does not
- Stores inventory
- Delivers merchandise
Texas
Business activities that create sales tax nexus in Texas:
- Reimburses for home office
- One employee telecommutes from home doing back office functions, or if the call center handling 1-800 calls is in Texas
- Delivers merchandise
Utah
Business activities that create sales tax nexus in Utah:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Vermont
Business activities that create sales tax nexus in Vermont:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
Virginia
Business activities that create sales tax nexus in Virginia:
- The fact that a company has in-state salespersons is sufficient, regardless of whether it provides reimbursement for an in-home office
- Advertising in newspapers or other periodicals published and printed in Virginia, on billboards or posters in Virginia, or through materials distributed in Virginia by means other than U.S. mail would confer nexus
- Stores inventory
- Delivers merchandise
Washington
Business activities that create sales tax nexus in Washington:
- Reimburses for home office, if the employee is based in Washington
- Maintains a P.O. box, if the seller has an employee/independent contractor in Washington (or travels to the state) to obtain the mail
- Stores inventory, which creates physical presence nexus
- One employee telecommutes from home doing back office functions, which creates physical presence nexus
- Delivers merchandise, including regular delivery in vehicles of the seller
West Virginia
Business activities that create sales tax nexus in West Virginia:
- Reimburses for home office
- Maintains a bank account
- 800 phone numbers
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
Wisconsin
Business activities that create sales tax nexus in Wisconsin:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Wyoming
Business activities that create sales tax nexus in Wyoming:
- Reimburses for home office – if the home office is for a sales person selling taxable goods, admissions or services or providing services after the sale or providing sales service, processing returns, or other activities related to the company’s sales activities
- Stores inventory
- One employee telecommutes from home doing back office functions – if the home office is for a sales person selling taxable goods, admissions, or services or providing services after the sale, or providing sales service, processing returns, or other activities related to the company’s sales activities
Voluntary disclosure agreements for tax compliance
Perhaps in response to the increased complexity caused by Covid-19 and the expanding scope of states’ jurisdiction, almost every state now offers a voluntary disclosure agreement (VDA) program. These programs are likely to be mutually beneficial to taxpayers and states; they help states encourage compliance, support companies that want to come into compliance, and mean fewer audits need to take place. Before trying to qualify for a VDA, it’s important to confirm eligibility for a state’s program.
Tax research and practice tools from Bloomberg Tax
What the future holds for state tax planning for corporations, especially in the wake of Covid-19 and a world of expanding nexus standards, is unclear. Our Summary of States’ Wayfair and Marketplace Implementation provides a top-line summary of the current state economic nexus and marketplace facilitator thresholds implemented following the Supreme Court’s South Dakota v. Wayfair decision.
Start tracking and evaluating the impact of expanding state sales tax nexus with Bloomberg Tax Research. Our tax expertise and tools give you a comprehensive overview of sales and use tax nexus, including state charts, key rulings, and the latest news and legal developments to help alleviate uncertainty and simplify corporate tax planning.
Request a demo to see how Bloomberg Tax can help you save time and tackle complex state tax planning tasks with ease.