For sales tax purposes “doing business” in a state is also referred to as having nexus.
Depending on the nature of your business, determining where you have nexus for the purposes of sales tax ranges from pretty straight forward to extremely difficult.
It is important to start out noting that nexus requirements for sales and use tax and income tax are not one in the same. It is possible for a small business to have sales tax nexus, but not have income tax nexus.
Businesses with income tax nexus, however, typically have sales tax nexus because the thresholds for sales tax nexus is generally less than for income tax nexus.
What is “doing business?”
It is sometimes unclear what business activities qualify as nexus under state law. You might own a donut shop, which only sells donuts from one location and your physical donut shop is where you are doing business for sales tax purposes.
For many businesses, however, making the determination of where they are doing business is not so easy.
Selling donuts from your counter is clearly doing business at the physical location of the donut shop, but when you are a contractor with workers and job sites in multiple locations, things can get a bit more complicated and you may have to turn directly to state law to figure it out.
What if your same donut business went to the big donut tradeshows in neighboring states several times a year where you also sold some donuts, are you doing business in that state?
If you are engaged in one or more of the following business activities in a state or taxing jurisdiction, usually you are engaged in business in that location and as a result, you will have a sales and use tax obligation in the state (i.e. you need to register, collect, and remit sales tax):
The laws around presence and solicitation of sales at tradeshows creating nexus varies from state to state.
If your business attends tradeshows to promote and sell your products, you must research the hosting state’s nexus rules to determine what types of activities will create a sales tax obligation within that state.
Some states, such as Texas, are very aggressive and will consider your business to have a significant presence in the state after only a single day of tradeshow or convention activities. Likewise in Washington, businesses can only participate in one trade show per year without establishing nexus, as long as they do not make any sales.
Once the business makes a sale, they have nexus in Washington. Other states have a tradeshow threshold that extends several days, for example: Connecticut (14 days), Massachusetts (3 days), Michigan (9 days) and South Carolina (14 days).
In addition to time duration, many states have a gross income of sales threshold that upon meeting, automatically establishes nexus.
Some examples are: California (15 days and over $100,000 in sales) and Georgia (5 days within 12 month period and over $100,000 in sales during the prior year).
As you can see from these few state examples, determining what specific amount of presence and solicitation of sales at a tradeshow creates nexus is complicated and can vary from one state to the next.
This is why it is important to check with your CPA or tax attorney if you are participating in trade shows in states other than where your business is physically located.
It is important to know that if you have “feet on the ground” (IE: salespeople) in a state other than the state in which your business is physically located, you are doing business in that state and will create a sales tax obligation within the state.
A few states have threshold rules, but these thresholds tend to be very low and are easily met if the salespeople are actively seeking and making sales within the state.
If your company provides services into other states, this too is often considered doing business in the state and will create a sales tax obligation.
It is important, again, to research whether the services you are providing are taxable in the other states. For example, your home state may exempt software installation services, but a neighboring state may consider those services subject to sales tax.
If your employees (and in some cases independent contractors) are providing software installation services in that neighboring state, you may find that you have a sales tax obligation for the service because your employees are physically inside the state providing the services that are taxable services under state law.
In today’s economy, there are an abundance of rental companies who are renting everything from camera lenses to wedding dresses.
All these items are delivered through common carriers, and shipped from the east coast to the west coast and to every state in between. As a business owner, it is essential to know that many state and local jurisdictions impose rental taxes on the rental of tangible personal property and that the mere presence of your property in a state or local jurisdiction can create nexus for your company.
This is hard for some companies to believe, so check with your CPA or tax attorney if you question whether you are doing business in the states in which you are renting your products.
Many companies use third-parties for multiple company activities. This can include suppliers, salespeople, developers, or even fulfillment services.
Generally, anyone that is not directly supervised or managed by the company is considered an independent contractor.
There is a false belief by many business owners that independent contractors do not create a sales and use tax obligation for the company within the states where the independent contractors are located.
The fact is that quite often the sales that independent contractors make and/or the services they provide on behalf of a small business, are generally considered doing business in the state in which they are located. A quick look at the “book club cases” illustrates how independent contractors can create nexus for a company.
The Scholastic Book Club operates one of the largest mail-order book clubs, distributing its books and related products only through schools, with the help of thousands of teachers that participate in the program.
The teachers distribute Scholastic’s flyers to their students, parents fill out the order form and return the payment to the teacher who then submits the order and payment to Scholastic. The order is fulfilled when Scholastic sends the products directly to the teacher, who then distributes the products to the students.
Many states, through legal decisions, have found that the act of receiving sales and distributing books by the teachers, even without compensation or a formal contract, created nexus for Scholastic.
This is just one example of a business activity by a third party that creates nexus for a company in multiple states. There are many other examples pertaining to various business activities and including post-sale services performed by independent contractors.
If your business is using independent contractors, be aware that this activity could create nexus and additional tax obligations for your company.
Many business owners will be surprised to find out that warehousing business property (AKA: inventory) in a state is considered doing business in the state and creates a sales tax obligation. The warehouse does not even need to be owned by your company for nexus to be created.
For example, the warehouse could be owned by a third party, such as Fulfillment by Amazon (FBA), which facilitates sales on your behalf.
When businesses sell on Amazon their products are stored at Amazon’s Fulfillment centers which are located across the United States. When a product is sold, Amazon picks, packs, and ships the product to the final customer (they even handle customer service issues).
As you can imagine, the task of determining sales tax obligations can become very difficult for business owners selling through similar (or multiple) fulfillment centers.
States have tried to simplify the space by enacting Marketplace Facilitator laws which require fulfillment centers to collect sales tax on behalf of their sellers. The number of states enacting these laws is growing and growing, but if a state doesn’t have laws in place, a business is left on its own to figure things out.
As you can see from the above example, determining where you are doing business for the purposes of collecting sales tax can become very complex.
Check with your CPA or tax attorney if you are selling through third parties or warehousing your inventory in states outside of your business home state and question your nexus. The laws surrounding this area are quickly shifting as states move the burden of sales tax collection to third-party sellers.
Does your business make deliveries to neighboring states in your own vehicle or by common carrier (e.g. UPS, FedEX)?
If you deliver products in your own vehicle, you may be doing business in those states. This is because you are physically setting foot in the jurisdiction and conducting business there personally, by delivering your products in your own vehicle.
In today’s borderless world there are many unique ways in which you can operate your business that create obligations to collect sales tax in other states; sometimes unknowingly.
Small businesses can trigger nexus in a state with salespeople, independent contractors, warehousing inventory, providing services, renting tangible items, delivering outside the state in a company vehicle, or even merely attending tradeshows.
If you are in doubt, it is a smart idea to get individual advice from an expert tax advisor or CPA when it comes to determining both your sales tax business obligations and the taxability of your everyday business transactions.
If your business wants to avoid the hassle of figuring out sales tax and all of the nuances we have described, solutions like QuickBooks Sales Tax can automatically calculate sales tax for you, saving you time.
Automated sales tax calculation and filing solutions, such as those inside QuickBooks Online, can help manage the nuances of sales tax laws, reduce the risk of error, and minimize the likelihood of a sales tax audit. QuickBooks Sales Tax not only provides automated calculations but also provides tax categories which can be assigned to individual products and services so businesses can be sure sales tax is accurately calculated to the line item; when it should be and how it should be. Whether a business sells coffee beans or t-shirts or provides traveling barbering services, QuickBooks Sales Tax has it covered.