3 Surprising Nexus Triggers You May Not Be Aware Of
At its simplest, sales tax nexus is the connection between a taxing jurisdiction, such as a state, and an entity, such as a business. Nexus is triggered when a predefined condition is met that establishes this connection. In the case of sales and use tax, triggering nexus means the business must collect, remit, and pay tax to the state.
Many things can trigger nexus, including reaching a particular economic or transaction volume threshold, having a physical presence, or providing services in a state. Unfortunately, the exhaustive list of nexus criteria varies widely, and there are a few often-overlooked triggers that can also create tax obligations for your clients. Below, we’ll discuss three common examples and explain what they are, how they work, and when they apply.
Companies with remote workers may trigger new nexus obligations.The pivot to remote work exploded in 2020 as companies reacted to lockdowns. Today, many have opted to continue supporting a distributed workforce. Here’s a breakdown.
- Remote employees made up about 15% of the global workforce before the pandemic. In September 2020, that number skyrocketed to 74%, then settled at 31% in March 2021. Data shows that 4.3 million Americans are working remotely today
- This trend impacted companies of all sizes, including mammoths like Amazon, Google, and Facebook. It also resulted in some really interesting tax implications.
- Here are a few situations where remote employees can trigger physical nexus:
1. A prior commuter who crossed state lines becomes remote:
When employees who previously crossed state lines to get to work become remote workers, their state of residence becomes their work state. This shift, especially common in large metros, may trigger physical presence nexus.
2. An out-of-state move triggers physical presence nexus:
Remote employees who move out of state may trigger physical presence nexus in their new home state. Be sure to verify what, specifically, triggers nexus in each state your client’s employees call home (ex; being engaged in sales activities) to make sure they’re up to date with all your tax obligations.
3. Dual residency 'technically' results in dual taxation:
This is a complicated one, so read to the end before you make any assumptions. In some cases, remote employees temporarily working from another state stayed long enough to become a resident there based on statutory residency rules. This situation may establish dual residency and, potentially, dual tax obligations.
However, a 2018 Supreme Court ruling established that two states may not tax the same income. Meaning, this becomes a situation where the employee has to determine where taxes are owed to make sure they’re not violating tax law. This can also be confusing for employers, so understanding all the nuances of this particular situation and being able to advise your clients appropriately is critical.
4. An employee who travels frequently triggers physical presence nexus:
Employees who travel to perform business functions, particularly involving establishing or maintaining a market in that state, may trigger physical nexus. It’s important to review each state’s physical presence nexus threshold guidelines, as they vary quite significantly.
- For example, in Washington, any of the following can trigger physical nexus:
- Here are a few situations where remote employees can trigger physical nexus:
- Engaging in activities significantly associated with establishing or maintaining a market in the state.
- Soliciting sales in Washington through employees or other representatives.
- Installing or assembling goods in Washington, either by employees or other representatives.
- Employees providing services, such as accepting returns, and performing product training.
- Using an exhibit at a trade show to maintain or establish a market.
- The key takeaway here is that if any of your clients own businesses that recently transitioned to partially or fully remote, it might be a good idea to review their nexus obligations with a little more scrutiny. Many potential physical presence triggers come into play with a remote workforce, and clients may have nexus in areas they aren’t aware of. Use the scenarios above to make sure you’re asking the right questions as you perform a comprehensive analysis of their tax obligations.
Exempt Sales Trigger Nexus in Certain States
- Before we get into details on this one, it’s essential to understand key economic nexus triggers:
- economic nexus threshold met based on retail sales
- economic threshold met based on gross sales.
- economic threshold met based on taxable sales (4 states)
Most states also have a transaction count component to their nexus threshold, though a handful don’t. In some states, the transaction count threshold is an “and” trigger; in others, it’s an “or” trigger - e.g., $500,000 in gross sales and/or 400 transactions into the state this calendar year.
Any time a company sells enough product into a state to meet the state’s economic nexus threshold, based on the volume of sales or number of transactions, they have to do three things:
- 1. Register with the state.
- 2. Collect sales tax on all future transactions into the state.
- 3. Remit tax to the department of revenue in that state.
- States that impose nexus based on retail sales often omit exempt sales from nexus threshold totals, whereas states that base thresholds on gross sales typically include exempt sales. As always, these criteria vary tremendously from state to state.
- So how do you know if a state counts exempt sales towards the nexus threshold? Look for the keywords “gross” or “retail,” which usually appear directly in front of the word “sales.” If you don’t see either one, watch for the word “exempt” in each state’s nexus threshold definition.
- Let’s look at a few examples:
South Dakota: Nexus threshold is more than $100,000 in gross sales or at least 200 transactions in the state in the current or previous calendar year.
Taxable and exempt sales count toward economic and transaction totals. Tangible personal property, electronically delivered products, and services are all included in the threshold count.
California: Nexus threshold is more than $500,000 in retail (taxable) sales in the current or prior calendar year.
No transaction count in the nexus threshold criteria. Though only retail sales are considered, retail sales of TPP that are delivered to the state by the retailer or its affiliates - including exempt TPP sales and TPP sales for resale - count toward the economic total. Services (taxable or exempt) do not count toward the threshold.
New York: Nexus threshold is $500,000 in sales of tangible personal property and more than 100 separate transactions made into New York in the last four quarters.
Exempt TPP (including software as a service, a.k.a. SaaS) counts towards the threshold. Marketplace sales also count toward thresholds for individual sellers.
As you can see, each state is a little different, so it’s very important to read the rules carefully and make sure you have a firm understanding of threshold triggers that apply to your clients.
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Local governments also impose nexus in some states.
A handful of states - including Alabama, Alaska, Arizona, Colorado, Idaho, Louisiana, and Missouri - allow certain cities, counties, and jurisdictions to set their own tax rates and rules. These rules are considered in addition to the rules set by the state. This gets complicated for businesses because, in some cases, a good or service will not be considered taxable by the state but will be considered taxable by a local jurisdiction.
For example, in Alaska, there is no state sales tax. However, individual municipalities have the authority to set their own tax rates, as do transportation, school, and special purpose districts - and some require businesses to remit directly to the local jurisdiction rather than to the state.
Colorado, Louisiana, Idaho, and Missouri are considered “home rule” states. In a home rule state, local jurisdictions, including cities, counties, and other local governments, have the authority to administer and establish their own sales tax rates and rules. In addition to setting their own rules and rates, some cities and jurisdictions also have their own filing schedule.
Though Alabama isn’t formally a home rule state, certain city and county governments still have the ability to collect local taxes. In Arizona, all local jurisdictions are managed by the state, but tribe governments set their own tax rates and rules.
So with all that complexity, surely there’s a cumulative document that outlines all the home rules that exist in participating states, right? Unfortunately, no. In fact, in most cases, businesses have to look beyond state tax sites and go directly to the local tax jurisdiction to determine their obligation in these areas.
We hope this post sheds some light on tricky nexus triggers you may not have been aware of. Sales tax nexus is complex and ever-evolving, and tax experts need to be diligent about staying on top of changes. Businesses turn to CPA firms for solutions, and they expect advisors to be ready to answer their questions. To be effective, your team needs to keep up with changing nexus laws and stay informed on unique state tax legislation.
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