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Economic Nexus And Exempt Sales?



Monika Miles And Nexus

If you’re an avid reader of our blog, you know that economic nexus is the hot topic when it comes to determining if a company has created taxable presence in a state. Since the Supreme Court’s decision in South Dakota v. Wayfair Inc. in June 2018, we’ve been helping clients to make sense of this  somewhat confusing concept.  While physical presence nexus (employees, inventory, office space) in a state is also still in play and creates a filing requirement, companies find themselves tripping into nexus much more quickly now because of the sales and transaction thresholds of economic nexus legislation, which varies from state to state.

Background

Any company that sells products into a state and exceeds that state’s economic nexus threshold (either based on volume of sales or number of transactions), needs to register in that state, collect and remit sales tax to the state. Companies that make some sales into a state but do not exceed the state’s threshold, do not need to immediately register, collect and remit sales tax. But we recommend that clients monitor the thresholds (which are often $100,000 of sales OR 200 transactions, but often vary) in any state where they have significant sales transactions.

But how does a company determine what makes up the amount of sales? Do exempt sales contribute to the total sales that determine whether a company meets the economic nexus threshold or not? Read on to find out more about how exempt sales count toward the economic nexus threshold.

Determination of the sales amount for economic nexus

States vary on how they determine if a company’s sales contribute to the economic nexus threshold. Some state sales thresholds are based on retail sales. When the sales threshold is based on retail sales, exempt sales are usually excluded in the sales amount. States that base the sales threshold amount on gross sales typically include exempt sales in the threshold.  But the rules vary.

For example, in North Dakota, the sales threshold is based on gross retail sales of taxable tangible personal property (“TPP”) and services, but does not include exempt TPP or services. On the other hand, California and New York include exempt TPP, but not services in their sales thresholds.

Exceptions to the Rule

Here are some additional nuances in other states:

  • In Alabama, wholesale sales of TPP are not included in the determination of economic nexus.
  • In Connecticut, it is important to note that as of July 1, 2019, exempt TPP and exempt services are included in the sales threshold, but not the transaction threshold.
  • In Illinois, sales for resale and other occasional sales are not included in the total sales when determining economic nexus.
  • In New Jersey and Tennessee, sales for resale are not included when determining the total sales for economic nexus.
  • In Vermont, remote businesses that only make tax-exempt sales into the state aren’t required to register.

As you can see, states can vary significantly, so it’s important to know the rules in the specific states where your company is doing business.

Exemption and Resale Certificates

In this post, we have discussed exempt sales and whether or not they count toward the economic nexus threshold. If your business has a significant number of exempt sales, it is important to keep accurate exemption certificates on hand. Exemption certificates prove which of your sales are exempt from sales tax. If the company is audited, you must provide the auditor with an exemption certificate to prove that those sales are indeed exempt. This includes exemptions due to the nature of the product (i.e.; exempt foods, medical products, etc.) and nature of the purchaser (i.e.; certain non-profit entities, certain governmental entities, and resellers).

In addition to being familiar with a particular state’s economic nexus requirements, it is also important to use the correct state exemption certificate. Many states accept the Multi-jurisdictional Uniform Sales and Use Tax Exemption/Resale Certificate, but not all do. Several states have their own exemption certificate and their own resale certificate as well. Each state also has unique rules for what qualifies as an exempt sale and for how long the certificate is valid.

As businesses expand their sales into more states, it is important to understand the nexus rules in those states where the company is making sales.

Have nexus questions? Contact Monika Miles

 

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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