A nexus study and taxability review determine where a company might have state tax exposure and the extent of that exposure. We work with our clients to identify their activities in various states and analyze the types of transactions engaged in within those jurisdictions.
Determining exposure before a proposed acquisition is good business. We also assist in determining possible exposure before a state comes to audit. And finally, we bridge the gap with respect to financial statement disclosure.
As part of each project, we work with clients to answer the following types of questions:
- What is nexus?
- Do we have physical presence nexus?
- Do we have economic nexus?
- Is my product or service taxable?
- Are there any available exemptions (e,g, food or medical exemptions, sales to qualified non-profit entities)?
- Must I start collecting and remitting sales and use tax?
- I’ve collected tax from a given state and have not remitted it-what now?
Once we determine possible exposure, we assist clients in receiving maximum benefit from available amnesty programs, contract for voluntary disclosure agreements, work with their customers to determine if they have self-assessed taxes (and can therefore reduce exposure for our client) or simply document their exposure.
In the United States, the sales tax landscape drastically changed due to the U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. In June 2018, the High Court made a landmark decision that it is constitutional for the State of South Dakota to enact an economic nexus law. This established precedent and paved the way for states to establish additional ways companies may establish nexus in their jurisdiction.
Now all states which impose a state level sales tax (as well as some local jurisdictions) have enacted economic nexus laws. As a result, companies must now consider both their physical footprint (employees offices, inventory) and the level of sales activity they have in a given state. Once nexus has been established companies need to consider registering for sales tax, collecting and remitting tax, and then filing tax returns. We call that “compliance.”
What Is Economic Nexus?
In states which have enacted statutes, economic nexus is based on the amount of sales by dollar volume or a number of transactions threshold. While states differ, generally, if either is met, economic nexus is triggered. Some states require both criteria for economic nexus to be valid, while others require just one of the two. In the South Dakota case, for instance, the thresholds are $100,000 in sales or 200 transactions. Some of the largest states (CA, NY and TX) have raised their thresholds to $500,000—making it a little easier on small sellers.
Additionally, some states base their economic threshold measurement on taxable sales, while other states base this threshold on gross sales.
Have a question? Contact Monika Miles.
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