Nexus, in a sales tax context, refers to the situation where a company has enough contacts with a state such that the state can force it to act as its tax collector. This issue of exactly what activities give a company nexus with a tax jurisdiction comes up very frequently even in the regular news media, especially recently with many states enacting so-called Amazon laws.
The Supreme Court has weighed in on the nexus matter several times over the years, most recently in 1992 with the Quill case. Before that it was the Bellas Hess and then the Complete Auto Transit cases. With Quill, they reaffirmed that a company must have a "substantial nexus with that state" before they can be forced to act as a tax collector. In Quill, North Dakota had taken a slightly different tack in arguing that since Quill owned some computer disks in ND it was enough to satisfy the established "minimum contacts" test of the due process clause. ND was unsuccessful in its argument -- to the chagrin of state governments everywhere.
Significantly, the Supremes ruled in Quill that state taxation is to be governed by the interstate (or dormant) commerce clause and not by the due process clause. Once the Supremes made that clarification, they signaled that any resolution of the nexus question is firmly in the hands of congress who are the constitutionally designated regulators of interstate commerce. The bottom line after Quill is that "minimum contacts" is not enough and that a more substantial physical presence is required.
Usually, nexus issue arise in the context of whether certain activities in a taxing jurisdiction will make it necessary for a company to get registered to collect. But what about the reverse situation -- that is, when a company no longer has nexus-creating activities and would like to get out of a state or "deregister" as we call it?
If you analyze your activities across the country you may find that you could support not being registered in so many places. If you could legally de-register in some of the states where you are currently registered, then you could save time and money each month in compliance headaches.
You can actually get out of the responsibility to collect tax once you no longer have nexus in a state, but as a general rule they don't make it easy and it can take a long time in some states to "check out".
According to our experience and research, the states vary widely in what they will allow you to do. For example, in Alabama, if you are registered for sales tax and your circumstances change such that you no longer have nexus, your filing requirement still continues until the end of the 3 year statute of limitations. In California, there is a general rule that the filing obligation continues for one filing cycle (month, quarter, etc.) with no activity. In Michigan, the filing requirement continues for the current month plus 11 more months. In New York, the company can cease immediately after surrendering its certificate of authority and filing a final return. In Texas, a filing requirement continues for a year.
As you can see, the treatment varies widely. But it's always a good idea to review your own facts and circumstances and evaluate whether you're collecting/filing in too many places. If you can reduce your filing footprint, the pain to do so, might be worth it. Just be sure, you're actually not going to reestablish nexus any time soon, or you'll have done a bunch of work for no good reason!
We Have a Chart for That -- You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. This particular matrix addresses this question of what are your filing responsibilities if you no longer have nexus in a state. We offer this basic research to you at no charge for up to 10 states. If you like to receive one of these charts, please email us here and just request it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.
What's the Best Way to Get Answers to Your State Tax Questions?
CALL THE STATE? -- This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.
But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.
Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.
GOOGLE IT? -- With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?
GET A RULING? -- What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.
ASK THE EXPERTS? -- Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.
And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.
Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.
So What Questions Do You Have?
Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.
CAUTION ON CHARTS --A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it's still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state's own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We're here to help, give us a call.