UNDERSTANDING NEXUS TO AVOID
UNEXPECTED LIABILITY
ONESOURCE Indirect Tax
The Tax & Accounting Business of Thomson Reuters
Presenter: NICOLE HUBERTY February 7, 2013
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Today’s Agenda
• Thomson Reuters Overview
• Key Definitions
• Legal Discussion
• Sales/Use Tax Nexus
• Potential Changes to Nexus
• Responsibilities When You Have Nexus
• Consequences - Not Being in Compliance
• What Now?
• Getting in Compliance
• Q & A
Customer focus Global scale and presence
Financial strength and stability
GLOBAL CAPABILITIES. LOCAL STRENGTH.
• Since formed in 2008 the Thomson Reuters brand is ranked 39 out of 100 in Global Brand Recognition.
• A recognized company
• Look at last years annual report
• 2010 Revenues: US $13.1 Billion
• 2010 Operating Profit: $1.4 Billion
• Global presence to better serve multi-national corporations
• Over 50,000 employees in more than 100 countries
• Thomson Reuters is the world’s leading source of intelligent information for businesses and professionals
• We do this by investing in state of the art technology,
• designing solutions that integrate with customer workflows,
• and investing in people so that our solutions are designed by experts like you.
BUSINESS OVERVIEW:
ONESOURCE INDIRECT TAX
• Thomson Reuters formed the ONESOURCE Indirect Tax
product line from 3 renowned brands to deliver an end-to-end automated solution for managing the indirect tax
compliance lifecycle:
TAX
DETERMINATION:
Sabrix (Sabrix, Inc. acquired by
Thomson Reuters in December 2009)
SALES & USE TAX COMPLIANCE:
ONESOURCE Sales & Use Tax
VAT COMPLIANCE:
INDIRECT TAX SOLUTION OFFERING
DOMESTIC COMPLIANCE U.S. AND CANADA GLOBAL TAX DETERMINATION VAT COMPLIANCESales & Use Tax Compliance Regulatory Compliance Consulting Tax Certificate Manager Reporting Sales & Use Tax, VAT Determination
Calculation
Global Tax Content & Research
ERP Integrations (i.e. SAP, Oracle)
Consulting Services
Reporting Data import and
consolidation
Working papers and data analysis
Manual adjustments
Returns, eFiling and reconciliation
Today’s Speaker
Nicole Huberty ,
JD
Lead Legal Analyst
• Responsible for researching and analyzing sales/use tax laws and regulations
• Corresponds with state and local tax authorities to monitor changes in sales/use tax rates and rules
• Law degree from University of Oregon
Definition of Sales Tax and Use Tax
• Sales tax is a transaction tax on the retail sale of tangible personal property and selected services.
• Use Tax acts as a complement to the sales tax. While sales tax is assessed upon the retail sale of tangible personal property, the use tax is generally assessed upon the storage, use, or consumption of tangible
personal property purchased at retail and upon which no sales tax was paid.
Definition of Nexus
Whether a company is required to collect sales/use tax is dependent on whether the company has nexus with the state
Nexus is the minimum connection or physical
presence that must exist before a state can impose tax liability and reporting requirements on a company.
Poll Question
Quill Corp. v. North Dakota
504 U.S. 298 (1992)
US Supreme Court Decision
Conclusion: A State can not require an out-of-state
vendor to collect sales or use tax unless the vendor has established a physical presence in the state
Facts: Quill’s Activities in North Dakota
• Mail-order vendor of office supplies
• Quill had no office, warehouse, retail outlet, or other facility located in North Dakota, nor were any Quill employees or sales representatives physically present in North Dakota
Quill Analysis
• State argued that physical presence should no longer be the defining point for nexus. With computers,
satellite transmission, etc., a seller can do business almost anywhere without physically being present.
• The North Dakota Supreme Court ruled that Quill had constitutional nexus through its “economic presence”.
• The U.S. Supreme Court reversed the lower court’s ruling and reaffirmed physical presence nexus
Substantial Nexus
Substantial Nexus
The threshold for substantial nexus is dependent on the type of tax
– Sales Tax – minimal physical presence
– Income Tax – Public Law 86-272
• Can have an employee or independent contractor if the person is doing no more than soliciting sales of tangible personal property
• Sales orders must be accepted and fulfilled outside of the state
– It is possible to have nexus for sales tax purposes but not have it for income tax purposes
What constitutes a physical presence?
Nexus refers to the links, connections, or
contacts between a political jurisdiction and a
taxpayer.
•
Company-owned property
•
Company employees
Company-Owned Property
•
Where do you maintain a permanent and/or
temporary place of business?
– Warehouse
– Sales Office
– Manufacturing Plant
– Trade Show Booth
– Sales Meeting
– Training Site
What business activities give rise to sales/use
tax nexus?
Company Employees
•
Where do you have employees permanently
and/or temporarily operating on your behalf?
– Sales People
– Service People
– Administrative Staff
What business activities give rise to sales/use
tax nexus?
Company Agents: Where do you have
agents operating on your behalf?
– Independent Agents
– Affiliated Companies
What business activities give rise to sales/use
tax nexus?
Poll Question
• Which of the following activities do you believe are creating your nexus exposure?
– Company-owned property
– Temporary Locations (tradeshows, sales meetings, training sites)
– Sales people
– Company agents / Independent contractors
State Threshold Nexus?
Massachusetts Regularly and systematically soliciting orders or otherwise exploiting the retail sales market
New York
Entering into an agreement with a state resident under which the resident, for a commission or other
consideration, refers potential customers to the seller
Pennsylvania
Maintaining a place of business, permanently or temporarily; and having an agent or representative, permanently or temporarily
Texas
Providing taxable services through company
employees, authorized repair or service agents, or independent contractors
How frequent are the activities within the state?
• Regular, systematic, on-going
• Infrequent, irregular, minimal contact
State Number of Days Nexus?
Arizona 3 or more
Michigan 2 or more
Minnesota 4 or more
General Concerns of Government
•
States Concerns about e-commerce
– Eroding tax base, lost tax revenues
– Increased cost of administration
•
Streamlined Sales Tax
– Goal: Reduce the complexity for remote sellers so that Congress will abolish the physical presence test.
– If the physical presence test is eliminated, all sellers into a state will be required to collect and remit tax.
Affiliate Nexus and Click-Through Nexus
• The Amazon laws aim to collect sales tax for
internet sales from companies who otherwise lack sufficient nexus to require them to collect sales and use tax on their Internet sales. They’re named after the biggest online retailer that the law targets.
• Many states are starting to refer to these laws as “click-through-nexus” laws.
Amazon Laws – First Legislation
• New York
– First to pass Amazon law in 2008
• North Carolina and Rhode Island
– Passed similar versions in 2009
• Colorado and Oklahoma
– Expanded nexus presumption for out-of-state retailers
Nexus Legislation - 2011
• Arkansas
– Affiliate nexus and click-through-nexus legislation signed April 1, 2011
• Connecticut
– Click-through-nexus legislation effective May 4, 2011
– Lower gross receipts threshold
• Illinois
– Click-through-nexus legislation effective July 1, 2011
Nexus Legislation – 2011
• South Dakota
– Affiliate nexus law expanding definition of nexus
– Law includes notice and reporting requirements
• Vermont
– Delayed implementation: Effective only after 15 other states adopt click-through-nexus laws
Nexus Legislation – 2012
• California
– 2011 Amazon legislation repealed for one year
– Effective date: September 15, 2012
• Colorado
– Direct Marketing Association v. Colorado DOR
– March 30th: Permanent injunction blocking enforcement of
notice and reporting provisions of nexus law
• Georgia
– Click-through-nexus legislation effective October 1, 2012
Nexus Legislation – 2012
• Pennsylvania
– Pennsylvania Sales Tax Bulletin 2011-01, 12/01/2011
– Remote e-commerce sellers to collect tax September 1, 2012
• Tennessee
– Affiliate nexus bill signed March 23, 2012
– Notification element
• Texas
– Amazon legislation passed in 2011
Nexus Legislation - 2012
• Utah and Virginia
– Affiliate nexus legislation
– Expands types of sellers who are required to collect tax
• Arizona, Connecticut, Indiana, Massachusetts,
Nevada, New Jersey, South Carolina, Tennessee, Virginia
– Agreements with states to start collecting tax
• Register and Collect Sales Tax: A retailer selling taxable goods or services within a state must register and collect sales tax on all taxable sales into the state
• Remit Use Tax: You must remit use tax on taxable purchases if tax was not charged by the seller
• File Returns: Remit the appropriate taxes in a timely manner
• Audit: Tax collection and returns are subject to verification by the tax jurisdiction
What are your responsibilities if you
have Nexus?
Consequence of not Registering when you
have Nexus
If a business has nexus within a state and does not register and pay the appropriate taxes, the business could face
costly consequences, which include:
– Steep penalties
– Extensive interest
– Risk of being accused of fraud –
especially if tax was collected and not remitted
What Now?
• Confirm and then document your business activities within each state.
• If you have activity / physical presence within the state then determine the date of first activity.
• Determine your exposure for that period of time
– How much tax should have been collected and remitted
– At any time was tax collected?
• Determine the best way to get in compliance with the tax jurisdiction
Getting in Compliance
• Self Register
• Register under an Amnesty Agreement
Poll Question
• Does your company have a solid understanding of their nexus footprint?
– Yes
95% of Survey Companies
Underestimate their Nexus Footprint
• A study conducted by ONESOURCE Indirect Tax found that 95% of companies surveyed
underestimated their sales tax liability
• Surveyed customers ranged in size from $3 million to $170 million in
revenue across a wide range of industries
• 85% of participating companies underestimated the number of states they needed to register in by more than 50%
• Mid-sized companies with customers all over the country were most likely to underestimate nexus and carried significantly more risk of audit exposure
