Over the past three years states have increased their sales tax collection efforts because of the need to raise additional tax revenue. One way they have done this is to expand the definition of what activities create sales tax nexus for out-of-state retailers. In some states, courts have ruled that in addition to a seller’s direct physical presence, an indirect presence may create sales tax nexus. One example of an indirect presence is through independent contractors in a state.
To illustrate indirect nexus: In New York nexus can exist when a customer in New York purchases a product through a retailer’s agreement with a New York resident for commission even if the ultimate retailer is out-of-state. In other words, potential customers that reach the out-of-state retailer’s website by clicking on a link on the in-state affiliate’s website could be subject to sales tax by the ultimate retailer even though that retailer has no physical presence in New York. Two more states, Rhode Island and North Carolina have also developed similar legislation. In addition, during 2011 fifteen other states have proposed laws that expand the nexus laws in some way.
Some states have passed legislation to include a nexus determination for a controlled group where one member of the group is located in their state even if that entity is not even the retailer selling the product into the state.
While in most states, the legislation that was passed to capture the sales tax on out-of-state retailers is being challenged in the court systems, it appears that the trend for states to expand sales tax nexus standards to include remote out-of-state retailers is continuing forward. The federal government has also become much more involved and Congress is currently considering three remote sales tax proposals.
So, what’s the saying, buyers beware? When entering a new state with your business be sure that you are well versed on the laws specific to that state; not only for income and payroll tax, but especially sales tax.
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