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Tuesday, January 10, 2012

Top 5 Sales Tax Nexus Issues for Technology Companies

Sales Tax Checklist for Technology Companies
  1. Do you make internet sales? (On all internet sales, sales tax is due...assuming the product/service is taxable. The issue is whether the seller has a duty to collect and remit or whether the buyer is required to self report.)
  2. Do you have affiliate relationships (for generating sales) with out-of-state companies?
  3. Do you have sales representatives travel outside of your home state?
  4. Do you engage in trade shows outside of your home state?
  5. Do you have employees or agents that perform services on your behalf outside of your home state?
If you answered "yes" to one or more of these questions, you could be creating a sales tax liability outside your home state. Also, remember income tax nexus is not equal to sales tax nexus. The rules apply differently.
Overview
Nexus is a "connection" or "link". Sales and use tax nexus refers to the connection between a person or entity and a taxing jurisdiction sufficient for that jurisdiction to require the person or entity to comply with its sales and use tax laws.
The current basis for determining when sales and use tax nexus exists is found in two Supreme Court cases; Quill Corp. vs. North Dakota [May 26, 1992], and National Bellas Hess, Inc. vs.Department of Revenue of the State of Illinois [May 8, 1967]. In both Quill Corp. and National Bellas Hess, Inc., the Supreme Court ruled in favor of the taxpayer, limiting the states' ability to impose its taxing authority over interstate commerce. The guidance derived from these two cases can be employed in today's markets to manage sales and use tax compliance responsibilities.
While most States continue to reference these cases when defining sales tax nexus thresholds, the States continue to pursue expansion of their sales and use tax authority. With nexus being the foundational element that requires a company to collect and remit sales tax, it's important to note some of the difficulties in determining whether a company has sales tax nexus or not.
As with most sales and use tax related matters, determining whether or not sales tax nexus exists requires some level of interpretation of a state's statute as it applies to the activities of the entity. With that backdrop, here are the most common issues that technology companies struggle with from a sales tax nexus perspective. Also, it should be noted that sellers do not actually "charge" sales tax. Rather, seller's "collect and remit" sales tax. This can be important. For example, as in the case of internet sales, sales tax is always "due". This issue becomes whether the seller has the obligation to collect and remit the tax or if the buyer is obligated to self report.
#1. Affiliate Nexus, "Amazon Laws", and Click-Through Nexus
The internet has resulted in a shift in our buying patterns and a decline in sales tax revenues. With our current tax system and the nexus rules as outlined above, an out-of-state retailer (translation - a retailer without nexus in the state) selling goods to a consumer or business over the internet is not required to collect sales tax. It is the buyer's responsibility to self-assess the tax and voluntarily remit use tax to the state. Most businesses are aware of this nuance but many consumers are not.
States ensure compliance with these laws through business audits; however, the states don't have the bandwidth, nor is it practical, to audit every consumer. So instead of going after the consumer, states are looking to implement taxing rules that require the out-of state business to collect the tax.
This is why "affiliate nexus", and the "Amazon Law" or "click through nexus" have evolved. These are ways in which states have tried to use the existing nexus standards to require out-of state retailers to collect the tax that otherwise would not have been collected. The typical scenario occurs when an out-of-state business forms a relationship with an in-state business (often referred to as an affiliate) for the sole purpose of customer referrals via a connection to the out-of-state business's website. For this referral, the in-state business receives some type of commission or other consideration. The relationship established through the affiliate programs creates nexus for the out-of-state business, creating an obligation to collect and remit local sales tax. Multiple states including Illinois and California have introduced recent affiliated nexus legislation mainly targeting large internet retailers such as Amazon, hence the title "Amazon Law". In reaction to this legislation, Amazon has dropped their affiliate programs in most of these states. By dropping the affiliate programs, the company intends to terminate its nexus with the state and avoid prospective sales tax collection responsibility. However, this can be problematic as most states deem nexus to exist for a period of at least twelve months subsequent to the activity that created nexus.
The State of New York has passed legislation, called the "commission-agreement provision," that creates a rebuttable presumption that a person (seller) making sales of tangible personal property or services is soliciting business through an independent contractor or other representative if the seller enters into an agreement with a New York resident under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller (click through nexus). The presumption applies if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of agreement with the seller is in excess of $10,000 during the preceding four quarterly periods ending on the last day of February, May, August and November. The presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in New York on behalf of the seller that satisfies the nexus requirement of the U.S. Constitution during the four preceding quarterly periods. N.Y. Tax Law 1101(b)(8)(vi).
Technology companies should review their affiliate programs and understand which states, specifically, have "Amazon Laws", "affiliate nexus" rules, or "Click-Through Nexus" rules. This is a constantly changing area that requires close monitoring. At the time of publication, California passed a 1-year repeal of their "Amazon Law".
#2. Traveling Sales Representatives
The idea of a sales representative sitting in a home office in a state other than where corporate headquarters is located is a clear example of an activity which establishes sales tax nexus in the state where the sales representative is based. However, what happens when that sales representative travels into other states to meet with prospects or customers? This type of activity frequently occurs with technology businesses as the sales representative meets with the prospect to demonstrate their product. Whether or not this type of activity creates sales tax nexus will depend on the state and the frequency of the activity. Each state's rules are slightly different in terms of the threshold that needs to be met to create nexus. However, for some states, a sales representative traveling into the state for a single day will create sales tax nexus. While other states have more lenient thresholds, a general rule-of-thumb is that three days of activity of this type will create nexus for sales and use tax purposes.
Texas prescribes that out-of-state sellers engaged in selling, leasing, or renting taxable items for storage, use, or other consumption in Texas must collect use tax from the purchaser. "Retailer engaged in business in this state" can include, in addition to other activities, any retailer: Having any representative, agent, salesman, canvasser or solicitor operating in Texas under the authority of the retailer or its subsidiary to sell, deliver or take orders for any taxable items. Texas Tax Code Ann. 151.107(a)(2); Texas Tax Publication 94-108, Engaged in Business (Sales and Use Tax), 11/01/2006.
Nexus Strategy: Instead of face to face customer presentations, technology businesses may consider conducting product demonstrations via the Internet through Webex, GoToMeeting, or another similar application.

Article Source: http://EzineArticles.com/6621579

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