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.

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

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.

State Tax Coronavirus Roadmap

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

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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.

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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

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Sales & Use Tax Chart

Easily compare economic nexus standards for all 50 states, including statewide and local interpretations.

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