States have become more aggressive in claiming a seller has
substantial nexus for sales and use tax purposes. They look for
in-state activities, relationships and assets of unregistered
businesses with customers in the state. Here are some tips to help
businesses determine their sales and use tax collection obligations:
Review “physical presence” law. The
1992 U.S. Supreme Court decision in Quill Corp. v. North
Dakota, 504 U.S. 298, held that a seller must have a physical
presence in a state before the state can require sales tax collection.
The types of physical presence that create nexus, however, vary from
state to state. State statutes, regulations, tax agency rulings and
court decisions should be reviewed regularly for developments. The
AICPA offers a directory of Web links at www.aicpa.org/
yellow/yptstax.htm.
Know where property is located. Verify
the location of inventory, goods out on consignment, leased property,
real property, equipment, computer servers and delivery trucks. Just
about any property—perhaps even intangible property such as
software—that a state may treat as tangible can create nexus.
Know the whereabouts and activities of employees and
representatives. Employees, independent
contractors, agents or representatives in a state may create nexus,
depending on the nature of the relationship and activities. Again,
states vary as to definitions, exceptions, time limits and the types
of activities the person or entity may engage in that create nexus.
Generally, the activities must relate to sales. Some nexus rulings
refer to Tyler Pipe Industries Inc. v. Washington Department of
Revenue, 483 U.S. 232 (1987): “… the crucial factor governing
nexus is whether the activities performed in this state on behalf of
the taxpayer are significantly associated with the taxpayer’s ability
to establish and maintain a market in this state for the sales.”
Examine the nature of transactions and relationships in the
state. Some states have broadened the types
of relationships that can create nexus. For example, a few states,
such as Arkansas, Idaho and Minnesota, provide that if a seller and
in-state business have a specified relationship and the in-state
business in some way promotes sales for the seller or has similar
products or company name, the seller must collect sales tax
In April 2008, New York modified its sales tax law to create a presumption that a seller is soliciting business through resident representatives if it compensates them for directly or indirectly referring customers. Thus, sellers who allow “associates” who reside in the state to place a link on their own Web page and earn commissions for sales generated when customers use the link may be subject to sales tax collection obligations in New York. (Online retailers Amazon.com and Overstock.com have filed suit challenging the law’s constitutionality—see “Tax Matters: Online Retailers Battle N.Y. Nexus,” page 96.) Most states, however, treat advertising alone as not creating nexus.
Take into account multistate operations and mobile customers.
A recent ruling involved a tire dealer with locations in four states
including Massachusetts and New Hampshire, which has no sales tax. The
Massachusetts Appellate Tax Board held that the seller’s New Hampshire
stores should have collected use tax when they installed tires on
Massachusetts cars, since employees could readily tell from the license
tag where the tires would be used. (Town Fair Tire Centers v.
Commissioner of Revenue, docket no. C280607 (6/08))
Always ask questions. Avoid past-due
tax liabilities, penalties and interest by regularly inquiring into
the business and Internet activities of clients and employers. An
individual’s sale of a few used items on an auction Web site might
grow into what a state might consider a business with sales tax
collection obligations. New services, such as on-site training, might
be offered, or new employees may work out of state and create new tax
collection obligations.
—By Annette Nellen, Esq., CPA, a tax professor and director of the MST Program at San José State University and an Irvine Fellow at the New America Foundation. She is a member of the Individual Income Tax Technical Resource Panel of the AICPA Tax Division. Her e-mail address is anellen@sjsu.edu.
