Guest Post | How to Assist Your Accounting Clients with Determining Nexus
Many of the CPAs we work with struggle when trying to determine the best way to support their clients’ sales tax needs. We know this task is time-consuming and complex, so we reached out to Joni Johnson-Powe, JD, CPA, to provide some information to help accountants help their clients. Joni has been in the industry for 17 years, and recently launched Taxnologi Solutions, LLC. We hope you find this post helpful, and if you have any outstanding questions, let us know!
More and more in today’s ever-changing digital economy, clients are challenged with running and growing their business while complying with tax rules that continually evolve and expand. In the state and local tax arena, I find that clients don’t know what they don’t know. This issue does not only impact small businesses and start-ups but also established companies.
Thus, the first step with assisting your clients with their multistate obligations is determining whether they have the obligation to file: Nexus. A client is deemed to have nexus where that client has “sufficient contacts” with the state or locale to succumb to the jurisdiction of the tax authority and obligation to collect and remit tax. The challenge we face as practitioners, however, is that the definition of “sufficient contacts” set forth in the Quill case continues to expand and explaining this complicated landscape to a client is not easy. Thus, it is important to gather some fundamental information about the clients’ business as part of the initial analysis of nexus:
- Identify all states where the client has sales. Also, in states like AL, AK, AZ, CO, ID, IL, and LA, identify the local jurisdictions where your client makes sales as these places have some local registrations and reporting requirements.
- Identify all states where the client has ‘people.’ This includes sales, corporate, or other employees. This information should also include any contractors or agents acting on a company’s behalf. This area tends to trip up a number of companies as they assume that contractors will not create nexus.
In addition, in most states having agents such as dealers or other relationships where a third party is selling, servicing, repairing, or delivering your goods or services for a commission or fee will create nexus.
- Identify all states where the client has property. Property includes tangible, intangible, real property, and inventory. This property can be either owned, rented, or offered on approval to consumers.
- Identify any related entities and activities between the companies. Find out whether the affiliate conducts any advertising or other services for or on behalf of your client in any states.
Many times clients assume that activities they engaged in throughout the various states are treated equally by all states for purposes of nexus. While many states adhere to the similar standards for nexus such as physical presence, economic, affiliate, and click-through nexus, the manner in which these standards are interpreted vary widely. Thus, once you gather information related to your client’s activities, further analysis of the state or local rules is necessary to make a final determination of nexus. Here are some common activities that constitute nexus in various states:
- Physical presence in a state such as an office building, field office, or warehouse owned or rented by the company.
- Employees or contractors working in a state.
- Intangible and tangible property in a state including inventory and equipment owned or rented by the company.
- Having an affiliate in a state.
- Remote sellers with online links provided by residents in a state (i.e. click-through nexus).
Keep in mind that these definitions and rules continue to evolve, as does your client’s business. Accordingly, revisit your nexus analysis with your client periodically to ensure they stay in compliance with filing requirements.
Joni Johnson-Powe, JD, CPA, is the Founder/CEO of Taxnologi Solutions, LLC located in Aurora, CO. She has worked for over 17 years in federal and multi-state tax income, tax compliance, and consulting, sales and use tax, tax automation, and property tax compliance. Joni has a specialized skill set in the sales and use tax automation arena. She has served as project lead on several integrations and tax conversions for large Fortune 100 companies. She has both industry and public accounting experience with Big 4 firms and large national firms. Joni worked for several years for Big Four accounting firms such as KPMG and Ernst & Young providing tax compliance and consulting services to clients in a variety of industries. She is a wife, mother of 4 and native of Colorado. Joni enjoys snowboarding and gardening in her free time.