However, unlike these nomads, there are four states where sales tax is here to stay. We call them the "Big Four" because not only are they four of the most populous states, but they also have the highest sales tax revenues in the country. No cute acronym for this one, but they are: California, Florida, New York and Texas.
These four states have been breaking new ground in the area of expanding their sales tax nexus (and therefore revenue) by widening statutory definitions of who is required to collect sales tax (also known as "nexus"). Other states are likely to follow suit by enacting similar legislation aimed at requiring more remote sellers to collect sales tax on sales made within their borders. So, unless you plan on doing business with Jane-Doe-Down-The-Street from here on out, chances are you and your business will be affected by the ever-expanding definition of sales tax nexus.
There are four key areas where the "Big Four" have been able to increase sales tax revenue (without raising taxes) through new legislation and/or expanded interpretation of existing nexus rules. This is where it gets tricky. Each area has its own stipulations regarding state specifics and special circumstances. Thus, organizations that transact business with customers in other states may be required to file in states other than their own. These broadening definitions of sales tax nexus ultimately increase your organization's odds of facing a potential sales tax audit. These areas are as follows:
- Click-through Nexus - also referred to as "click-thru nexus" and "Amazon Laws" nexus exists if a certain amount of revenue is generated via online referrals. (NY, CA and TX)
- Affiliate Nexus - nexus exists if you maintain certain types of affiliate relationships in the state. However, depending on whether you are New York, California, Florida or Texas, specific language may exist regarding certain entities such as the treatment of distribution centers in Texas. Download whitepaper for more info. (NY, CA and TX)
- Taxing Digital Goods - the definition of what is considered a digital good varies from state to state, adding to the confusion of what's taxable and what's not. In some states, there are specific taxability rules in place aimed at taxing the intangible - businesses, beware! (CA and TX)
- Drop Shipments - Like digital goods, drop shipping rules are a nexus-triggering booby trap. In some states, contracting with drop-shippers can create nexus under certain circumstances. Did you catch that? Some States + Certain Circumstances = Nexus-Triggering Booby Trap. (NY, FL, CA and TX)
As if the litany of nexus-creating legislation wasn't enough, recent passage of the Marketplace Fairness Act would allow states to require all out-of-state businesses, with remote sales over a certain threshold, to collect and remit tax - regardless of other nexus concerns.
Anxious to Get a Grip on Sales Tax Nexus?
It's true - all companies that sell outside their state will one day be impacted by sales tax legislation. For the latest on sales tax legislation trends and how you can protect yourself and your business from a costly negative audit, download the "You Can't Ignore the Big Four: How California, Florida, New York and Texas are Changing the Sales Tax Game" whitepaper.
