Interstate commerce makes tax avoidance a sticky conundrum
By Greg Barbish, CPA
One of the benefits of having a business in Delaware is the absence of a state sales tax. Customers can save money by driving across state lines to patronize your business, and you don’t have to track collections and make regular payments to the state.
And yet few companies today can thrive with a Delaware-only model. The internet makes interstate transactions inevitable for almost every business, and with those transactions come sales tax headaches.
If you haven’t heard about nexus, it’s time to learn. If you know about nexus, consider a refresher course.
“Nexus” relates to whether your business has a sufficient connection with another state to require you to comply with its sales tax laws.
What makes the situation more complicated is that different states have different standards. State laws vary as much as their tax rates. What constitutes nexus in Pennsylvania may not be the same in New Jersey or Maryland. In some states, simply participating in a single trade show might be enough to meet its nexus standard.
In addition, cities and counties in some states impose their own sales taxes on top of the state’s levy, adding another layer of complexity to your bookkeeping. Some jurisdictions even tax products at different rates, or not at all. Delaware does have a gross receipts tax that businesses must pay quarterly, but it’s not collected from customers. It’s paid by the company.
To prepare for a nexus study, the business should know:
- whether it has sales personnel or employees permanently located in another state
- whether its sales people travel to other states to solicit business
- how the company delivers its products to destinations in other states
- whether it has a warehouse or other property (either leased or owned) in another state
- whether its employees or independent contractors complete installations, repairs or training in another state
The business should also know who determines whether its sales are taxable, and whether items are separately identified on invoices. The business should also be prepared to provide its tax advisor or accountant with details on how it collects and remits local taxes, how it reports sales, whether it has exemption certificates from other states, and how it keeps tracks of sales tax rates in other jurisdictions.
With this information in hand, an accountant or tax professional can advise management about the company’s responsibilities for tax compliance, including a schedule of what tax forms have to be filed and when.
There is, of course, always the possibility that a nexus study will reveal that a business has slipped up and neglected to collect and make payments to one or more jurisdictions. While that is not a pleasant finding, it is almost always preferable to clear up the matter by making payments before being charged interest and penalties on whatever is due.
Accountants are used to hearing business owners complain about taxes being onerous, but there is a bright side to assessing your nexus obligations. If you’re doing business in more and more states every year, chances are your business is doing fairly well.
Greg Barbish is a certified public accountant with Horty & Horty P.A., a public accounting firm with offices in Dover and Wilmington.