I'm wondering if companies are proactively limiting nexus (say like Amazon). Most of the companies I've worked at allow hiring in any state in which the "best'' employees are found. Whether this creates sale
Does your company limit nexus?
Answers
Bob.
Yes and terribly difficult. Especially when it comes to certain types of rare talent (engineers with particular skills / sales with particular contact networks).
Over time, we've migrated to assuming tax-nexus if we've got sales and employees in the same location. I personally think it is overkill, but the tax advisors tend to advise caution when States are hunting for every red penny they can find. Retail is of course worse than wholesale.
I haven't addressed this extensively with sales tax as a driver. It certainly can make a difference in the selling price. Happily, there are services that handle the sales tax nightmare, and they aren't too expensive, so largely it is a competitiveness issue.
Solutions:
-Carrot: Relocation. I've had employees flatly refuse, and have hired them anyways. That means another tax return, maybe sales tax, lots of registration paperwork. Seriously, you can pay a *lot* in Relo and save $, even before you get to the sales tax question.
-Stick: Departmental P&L. If you demonstrate that an employee in a particular state will cost materially more, take it out of the manager's budget. This is the alternative to just saying "NO". Some companies will say no outright, but I prefer a gentler approach (in retail it can be more acute)
-Dodge: Contractors, sub-contract firms and the like. Simply don't hire the people, and put them in a different, unrelated entity. A bit of a kludge, and if you're big enough, this seems to attract attention. These days it is incredibly easy for people to self-incorporate, etc; it gives them ownership, and is generally a cool thing. BUT...you need decent advice. If the person is a principal in a transaction, you're going to create problems for yourself. Additionally, you don't truly control the sub. I do this all the time overseas...find talent in who-knows-where, and it just isn't worth the hassle of hiring them. But, do it with good advice!
Soapbox moment: I honestly wish this were an interstate commerce thing, and that they had a sales tax clearing house, so all sales in a certain venue got taxed, and we got back to a level playing field. Not being pro-tax, just, these structure incent unproductive behavior.
Cheers,
KP
You technically do not save your customers the sales tax costs by not charging them regardless of nexus. If it is taxable they should be recording a use tax if you do not bill them. That is in the perfect world though and there is a practicality of not charging them.
You should consider nexus issues when hiring or seeking out a new location for an office, warehouse, etc. Ultimately that should not be the deciding factor but it should be a factor.
Hi Lyle, Good point about not saving sales taxes for customers who rightfully file use taxes. Thanks for clarifying this aspect. The main point of my question is whether companies are actively avoiding nexus to avoid the administration of state filings (sales and income taxes) -or- are state filings an unavoidable consequence of doing business in the US.
We never used to pay the use tax from purchasing from Amazon or other companies that don't charge sales tax but only out of ignorance. We were not aware we were supposed to be and didn't purchase from these places often (this was a few years ago). We got audited by the state and I can assure you we pay use tax now. Luckily we really didn't purchase much so the impact was minimal but I can imagine this could be a big issue for many companies. I had not thought about hiring issues in the other states. Something we need to consider as we are looking to expand across state lines.
Yes, I have been the
Unlike B2B businesses where the Buyer usually reports these items on their Use Tax returns, and there are other ways the Seller may be able to mitigate the payment of uncollected sales tax upon audit, B2C businesses really have no other recourse other than to bear the cost and remit the uncollected tax. This can be significant, e.g. CA Sales Tax is north of 7.75%. Also, as States have become more desperate for funds, the definition, and application, of the rules for what gives rise to nexus for sales tax purposes has expanded. You can't just rely on the Supreme Court's definition in Quill any longer. I have seen States attempt to establish sales tax nexus based upon sales people attending tradeshows in their states. In addition, States are attempting to create nexus by "attribution", e.g. affiliate programs, rep programs, 3rd party service or warranty programs.
The problem comes in when you first establish nexus, will the state use this as a red flag to go fishing in prior years and attempt to and assert that you had nexus in those years as well.
Also, keep in mind, that Nexus for sales tax purposes, is not necessarily the same as Nexus for income tax purposes.
My advice, and my operating principle is to always do a thorough analysis of the nexus issue, with outside experts, prior to hiring, locating property, having affiliates, etc. in any state where you do not already have a physical presence. If you are a new company, and charging sales tax doesn't impede your ability to make a sale, then charge sales tax from day one. The administrative burden can be cost effectively handled by firms which specialize in sales tax compliance, similar to what ADP, Paychex, and other payroll processing companies do for their clients.
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