These days, most companies conduct business across state lines. Even if you think you are compliant, there may be taxes and fees you are unaware of. A nexus study may be the best step for your organization to take to ensure you are meeting all of your sales tax liabilities. Keep reading to learn what a nexus study is, if your organization needs one and how Miles Consulting Group can help.
What Is A Nexus Study?Let’s first clarify what nexus is. Sales tax nexus occurs when your company has some sort of connection to a state that has a sales tax. Although 45 states and the District of Columbia have a state level sales tax, the laws that create sales tax nexus can vary slightly state by state. Overall, most states agree that a physical or economic presence creates nexus. (And just to avoid confusion, we also address nexus as it pertains to income tax – but for purposes of this blog, we are focused on sales tax.)
What are ways that a business can create nexus in a state? Below are examples of physical presence creating nexus.
- Having an office in a state
- Having an employee, salesperson, contractor, etc. in a state
- Owning a warehouse or storage facility in a state
- Storing inventory in a state (such as in an Amazon FBA warehouse or other 3rd party fulfillment center)
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
And, of course, as we’ve written about frequently, economic nexus is created by crossing certain sales thresholds – either dollar or number of sales.
Now that you know how nexus is created in multiple states, what is a nexus study?
A nexus study is a process to analyze and review all your business activities and sales in a state (or states) to determine if (and very importantly, when) they create sales tax nexus. A nexus study is often the first step to becoming sales tax compliant since it tells you where you have sales tax obligations, and when they started and can help determine what next steps need to be taken. We often describe it to our clients as taking a snapshot of your sales tax situation at a moment in time to determine a.) if you have created nexus in the past and therefore have a retroactive filing responsibility (and more importantly, sales tax obligation) in a state, b.) what the dollar amount of that retroactive exposure is (along with potential interest and penalties), a remediation plan and a plan for going forward.
What Are The Benefits Of Doing A Nexus Study?
We have conversations daily with potential clients who aren’t fully compliant with sales tax, but really do want to become compliant. And the conversation often starts with “Can I just register for sales tax and start collecting and filing going forward?” Well …. no. States want to know (on the registration documentation, that a company representative files under penalty of perjury) when nexus was first created. If it was, say, three years ago, the state would require the company to pay that tax. Many companies are not aware of that, nor in a position to pay those back taxes.
A nexus study can help to determine that snapshot of potential exposure, so that you can properly analyze the situation (along with your favorite state tax consultant) and what the best next steps are toward full compliance. If you think you may have a sales tax problem, a nexus study is a way to effectively diagnose the problem, and for that matter, a possible income tax problem as well.
A nexus study can also be beneficial if you believe you have been fully compliant but need some clarity on your obligations going forward. It can help determine if you no longer need to file in certain states that you needed to in the past.
Another area where a nexus study is beneficial is before a merger or other transaction. The buyer company will always engage in due diligence to determine whether there are outstanding sales tax liabilities. Potential targets (or sellers) can do themselves a huge service by having those questions answered for themselves before a third party reviews that situation in the heat of an M&A transaction.
How Can Miles Consulting Group Help?
We tailor each nexus project to the specific client to ensure needs are being met. Here are some of the questions we may ask you as part of your review:
- Do you have physical presence nexus?
- Do you have economic nexus?
- Is your product or service taxable?
- Are there any available exemptions (e.g. food or medical exemptions, sales to qualified nonprofit entities)?
- Do you need to start collecting and remitting sales and use tax?
- You’ve collected tax from a given state and have not remitted it – what now?
- You’re a target in an M&A deal? Let’s confirm whether a buyer would find any skeletons in the closet!
Once you have completed a nexus study and established where you have liabilities, what are the next steps?
After we determine your liabilities, Miles Consulting Group can continue to support you through your compliance journey. When we determine possible exposure, we help clients receive maximum benefit from available amnesty programs, contract for voluntary disclosure agreements or simply document their exposure if that is all that is needed at that point.
Please contact us today if you have any questions or are interested in moving forward with a nexus study.
