Today’s post is a little different than the last one – partly in format as well as topic. It will also be part of a series. I decided to address a topic that is something many small business owners have questions about. That doesn’t mean it isn’t relevant to larger businesses as well though. In some cases, it is the larger small business to medium sized business that may have the most issues with it. Nexus, particularly for Sales Tax is the topic I want to discuss today. I have set it up in a Question/Answer format with questions that are frequently asked by small business owners.
Q: What is Nexus and why as a small business owner should I care?
A: In its simplest terms, Nexus when applied to business means that the business has a presence within the state that would require the business to pay income tax and collect and remit sales and use tax as well as other taxes. Another way to say it would be that nexus describes a level of business activity within a state. That level varies from state to state and even tax to tax to some degree. This article will talk about two taxes primarily. The sales tax and the income tax.
Q: How I do I know if I have nexus and can I have nexus for sales tax & not income tax?
A: Nexus determination is somewhat different for income tax and sales tax.
For Income tax, in general, nexus is created if the entity derives income from sources within the state, owns or leases property in the state, employs personnel in activities that exceed the level of “mere solicitation”, or has capital or property in the state. These requirements will vary from state to state.
For Sales tax nexus is defined more loosely. Some examples of things that will trigger nexus for sales tax are: A physical location within the state; resident employees and in some cases this extends to independent contractors as well. (see US Supreme Court: Scripto, Inc. v. Carson: S.Ct. 362 U.S. 207 (1960)); if the business has property (including intangible assets such as Trademarks, Copyrights, and Patents) and employees who regularly solicit within the state.
In the past, a physical presence has been required. Over the last few years however, nexus has also been invoked in relation to affiliates. (we will talk more about affiliates at another time) Overall, the issue of nexus is very complex and can change with the facts of each case.
Q: I have heard of something called Use tax. What is it and how do I know if I owe it?
A: The use tax is a complimentary tax to the sales tax. In terms of rate, it is usually but not always the same rate as the Sales tax. It is assessed on items that are purchased “tax free” such as mail order and internet purchases that cross state lines where no sales tax is paid.
An example would be is if I am in Utah, buy something online from a company in Florida, I won’t pay sales tax unless that company has a physical presence in Utah that would require them to collect and remit the Utah tax. As the purchaser, I am liable for the tax and am supposed to report and remit the tax on my income tax return. If I live in the Salt Lake City area where the tax rate is 6.85%, that means that on a $1000 sale, I owe $68.50.