TOPIC
Navigating State Tax Nexus to Ensure Compliance
July 28, 2022
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 principles in state taxation.
What the future holds for state taxation, especially in the wake of Covid-19 and a world of expanding nexus standards, is unclear. Bloomberg Tax Research provides a comprehensive comparison of each state’s policies to help alleviate uncertainty for multistate taxpayers.
On top of an already complex field, a global pandemic has brought drastic and widespread changes to the way companies and tax departments conduct business, piling additional challenges and complexity onto already difficult issues. Additionally, the states’ views of their own jurisdiction to tax out-of-state companies have continued to broaden since the Wayfair decision in 2018, creating even more complexity and increasing the potential for tax exposure for multistate taxpayers.
Download: Survey of State Tax Departments
Our comprehensive report clarifies each state’s position on a variety of state tax hot topics, including corporate tax income, sales and use tax nexus, pass-through entities, conformity to federal tax reform, and methods of sourcing income.
How do the different state nexus calculations affect compliance and tax planning for multistate taxpayers?
The variety of tax laws amongst the states creates problems for practitioners and 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.
The variety in the way states calculate economic nexus alone creates complexity for taxpayers simply attempting to determine where they should be collecting and remitting tax. Sales and transactions for determining economic nexus might include or exclude wholesales sales, exempt sales, marketplace sales, and sales by affiliated entities, or 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 the states’ tax rules create extensive difficulties and complexity even in dealing with what should be straightforward concepts. Research into relatively simple concepts such as just what constitutes a tax year may take a lot of time and effort to answer because of the variety across state rules. These differences in state tax rules may even mean that a single transaction is treated differently in different jurisdictions.
How to Determine Sales Tax Nexus
Learn how to evaluate state-by-state sales tax nexus requirements since Wayfair and advise your company or clients on staying compliant and managing their tax position.
How do remote workers affect tax nexus?
The Covid-19 pandemic continues to create tax compliance challenges. 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 almost all expired. As a result, taxpayers need to be more cognizant that their new work arrangements could likely create nexus for corporate income, franchise, sales or gross receipt taxes. In addition to nexus issues caused by telecommuting, remote work may cause chaos with multistate taxpayers’ eligibility for tax credits.
Complicating matters, there may not yet be state guidance on how to deal with the continuing prevalence of teleworking. States are just beginning to come to grips with how they’re going to deal with sourcing and apportionment and nexus issues that arise from working from home.
Download: State Tax Coronavirus Roadmap
Covid-19 caused cascading changes to both federal and state tax policies. This roadmap highlights updates to state legislation and agency guidance.
Will telecommuting employees create sales tax nexus?
In our Survey of State Tax Departments, we asked a series of questions about whether general sales and business activities—including telecommuting—would create nexus.
Alabama
No response
Arizona
Activities that create sales tax nexus:
- Reimburses for home office
- Delivers merchandise
Arkansas
No response
California
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Delivers merchandise, determined on a case-by-case basis
- Delivers in returnable containers, determined on a case-by-case basis
Georgia
No Response
Hawaii
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- Delivers merchandise
Illinois
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
Louisiana
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
Maryland
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Minnesota
Activities that create sales tax nexus:
- Reimburses for home office – if they spend more than 3 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 3 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
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
Missouri
Activities that create sales tax nexus:
- Reimburses for home office
- Maintains a P.O. box
- Local phone numbers
- 800 phone numbers
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
Nebraska
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Reimburses for home office
- Maintains a P.O. box
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
New Mexico
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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 on the vendor’s company-owned vehicles
North Dakota
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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 7 days in a calendar year and the seller has more than $25,000 in Ohio sales in a calendar year
Oklahoma
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- Delivers merchandise
Pennsylvania
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Vermont
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
Virginia
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- 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
Activities that create sales tax nexus:
- Reimburses for home office
- Maintains a bank account
- 800 phone numbers
- Stores inventory
- Delivers merchandise
- Delivers in returnable containers
Wisconsin
Activities that create sales tax nexus:
- Reimburses for home office
- Stores inventory
- One employee telecommutes from home doing back office functions
- Delivers merchandise
- Delivers in returnable containers
Wyoming
Activities that create sales tax nexus:
- 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
How are states determining sales tax nexus for remote businesses?
Compounding the complexity caused by Covid-19, since the 2018 Supreme Court decision in Wayfair allowed the states to impose taxes 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 solely base the tax on sales into the state, when the physical presence is slight. And now, with the states broadly interpreting their economic nexus rules, remote businesses are more likely than ever to find that they have nexus in multiple states.
Sales Tax: Wayfair Decision
Your state tax resource to navigate the Wayfair decision’s impact on U.S. sales tax for online businesses.
Which states offer voluntary disclosure agreements? How can they help businesses comply with state tax law?
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 for both taxpayers and the 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.
On-Demand: ASC 740 States Overview
This webinar includes an overview of the basic concepts of accounting for state income taxes under ASC 740, including state taxable income, state modifications, state credits, and the federal impact of state taxes.
Tax Research and Practice Tools
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Sales & Use Tax Nexus Evaluator Tool
Assess whether a taxpayer has state tax nexus with our interactive evaluator tool.
Nexus Topic Hub
A comprehensive overview of the field of sales and use tax nexus, including state charts, key rulings, and the latest news and legal developments.
Sales & Use Tax Chart
Easily compare economic nexus standards for all 50 states, including statewide and local interpretations.
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