Posts Tagged ‘Sales tax software’

When it comes to collecting sales taxes, nexus (or location) is everything, as we are reminded by our friends at Avalara, a provider of cloud based tax automation for businesses of all sizes (Disclosure: we have clients using their software today).

Selling products to customers in multiple states can be taxing in more ways than one.  It’s complex, confusing, ever-changing, and the penalties for failure to comply can be daunting and significant.  Avalara’s software automates the tedium of knowing what tax to charge which customer, in any state.  It also manages all the necessary certificates.  It works in real-time by parsing invoice information to a cloud-based tax calculator which instantly and automatically inserts the proper sales taxes.

The fundamental question in nexus then is: “Where must we collect, remit and report?”  A recent white paper from Avalara (available free by asking in our Comments section) helps answer the question.  Of course, Avalara will tell you that you’ll need their software to fully automation the problem’s solutions, but you already knew that.  Still, they helpfully provide the basics you need to know regarding nexus.  If you have nexus (or presence) in a certain state, you generally must collect sales taxes in that jurisdiction.  But the “where” can be tricky, as rules vary from state to state.  Some examples:

  • A physical presence in a state, i.e., an office or a representative or a warehouse. If you have nexus in multiple states, you’ll be liable to collect and remit sales taxes likely in all of them.
  • Delivery and distribution: States Avalara, “As long as you ship goods to customers by a common carrier such as USPS, UPS, or FedEx, you are unlikely to trigger a sales tax obligation through delivery. In some cases, however, the use of a drop shipper or a contract with a distributor that functions as a drop shipper is considered a taxable nexus-creating activity.”
  • Employee location: “Nexus can also be created if you employ sales people in different states. If your employees or contractors conduct any work at a customer’s out-of-state location or deliver products in another state, nexus can also apply.”
  • Event attendance: “Regularly attending tradeshows in other jurisdictions beyond the physical location of a business can also be considered nexus in certain states.”
  • Advertising and affiliates: “If you advertise online or use affiliates to get business, you may trigger nexus. When a business in another state sends customers to your business through links on a website, this can create nexus in the originating state, according to affiliate or click-through nexus laws.”

While the case law is clear, the Internet is once again changing the nature of nexus, and who must pay.  As Avalara notes in a concluding comment:

In 1992, the Supreme Court decision in Quill Corp. v. North Dakota (1992) confirmed that, under the Commerce Clause of the U.S. Constitution, vendors with no physical presence in a state did not have nexus requiring them to collect sales tax, even if they makes sales to customers in that state.  However, as states attempt to collect as much sales tax as they can, nexus-triggering possibilities keep growing. Amazon.com, for example, collects sales tax in half the states in which it does business due to expanding definitions of nexus.

A copy of the white paper is available free from us, or from Avalara.com


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