Many state governments struggle to collect enough revenue to fund their growing obligations. Politicians don’t want to ask the voting public to hand over more of their hard-earned money lest they lose their ability to call themselves politicians. It’s no surprise they’re finding creative ways to get tax revenue from businesses that are headquartered elsewhere but conduct business within their borders.
Depending on how you’ve structured your operations, you may unwittingly find yourself squarely in the tax authority’s crosshairs with a backlog of liabilities. However, you may be able to make some operational adjustments to reduce your overall tax liability.
It’s all a matter of learning a little bit about something called nexus.
What is State Nexus Tax?
States may assess taxes on companies that have a recognized presence within their borders (a.k.a., nexus). Presence could refer to a manufacturing plant, an office, a storefront, a warehouse, or distribution facility. It could reflect the presence of one or more employees or the presence of an affiliate who operates on your behalf. It might arise if you participate in a trade show or hold inventory within their borders. It could be triggered by the number of sales or income earned in that state. And just to make things interesting, each state has its own set of rules governing nexus and the impact it has on taxation.
However, by federal law, states may not assert income tax nexus when companies are solely soliciting sales in the jurisdiction. This protection does not extend to other types of taxes such as sales, gross receipts, franchise, etc.
Many consumer products companies have long shielded themselves from the administrative burden and exposure of certain state tax obligations by working with distributors. Upon sale and transfer of goods and services to the distributor, the company is relieved of association with the final point of sale. The distributor assumes the burden of collection for sales taxes and takes responsibility for all other final sale assessments.
With the growth of fulfillment arrangements, this long-held arrangement is rapidly changing.
Monitoring Inventory Location
Amazon offers a convenient marketplace through which companies gain direct access to consumers. For a fee, Amazon makes its online marketplace available to vendors as well as its extensive distribution infrastructure for fulfillment. It’s a good deal for Amazon because the company earns fees off its pre-existing network while avoiding the costs and risks of owning the inventory. It’s a good deal for companies in that they capture more revenue that sweetens their bottom lines. So where’s the rub?
Amazon has a huge network of warehouses nationwide as well as the freedom to place products wherever it suits them. By selling directly to the consumer through Amazon, a company could unknowingly establish a presence in other states based on where Amazon chooses to hold inventory. Companies need to direct Amazon to collect sales tax on a jurisdiction by jurisdiction basis, which will include the jurisdictions the company is already subject to taxation in as well as those it will become subject to taxation in by way of the inventory Amazon holds in their fulfillment warehouses. Unfortunately, Amazon will not alert companies to their growing tax footprint as inventory is moved about the country. Sellers will need to continually monitor the location of their inventory via the Inventory Events Report available in Amazon’s Seller Central to determine what jurisdictions they may be taxable in.
Making the Most of Nexus
If this issue has caught you by surprise, you are not alone. It is a little-known trap for the unwary. Companies with fulfillment relationships with Amazon should evaluate their state footprint to remedy any past infractions and establish appropriate processes going forward. A silver lining may even emerge for companies with substantive operations in states with unusually high tax rates. By establishing a presence in a state with lower tax rates, they might be able to reduce their tax liabilities!
If you have any questions on state nexus, our advisors are here to help. Connect with our team here.
Meet the Author
Carrie Sowders, CPA
Aldrich CPAs + Advisors LLP
Carrie leads our Manufacturing group at Aldrich and specializes in serving large and middle market companies, primarily in the consumer and industrial products sectors. Carrie has exclusively practiced in tax since beginning her career in 1998. Prior to joining Aldrich in 2009, Carrie spent a decade with Deloitte and oversaw the tax function of a…
- Certified Public Accountant
- Manufacturing tax
- Consumer business
- Multinational corporate issues
- Tax accounting and methods