Affiliate Nexus Law

Under the Affiliate Nexus law, a seller is presumed to be engaged in the business of selling tangible personal property or taxable services for use in the state if an affiliated person is subject to the sales and use tax jurisdiction of the state and the:

1. Seller sells a similar line of products as the affiliated person and sells the products under the same business name or a similar business name; 
2. Affiliated person uses its in-state employees or in-state facilities to advertise, promote, or facilitate sales by the seller to consumers; 
3. Affiliated person maintains an office, distribution facility, warehouse or storage place, or similar place of business to facilitate the delivery of property or services sold by the seller to the seller’s business;
4. Affiliated person uses trademarks, service marks, or trade names in the state that are the same or substantially similar to those used by the seller; or
5. Affiliated person delivers, installs, assembles, or performs maintenance services for the seller’s purchasers within the state.

Opportunity to Rebut Presumption

The presumption may be rebutted by demonstrating that the affiliated person’s activities in the state are not significantly associated with the seller’s ability to establish or maintain a market in the state for the seller’s sales.

“Click-Through Nexus” Law

If there is not an affiliated person with respect to a seller in the state, the seller is presumed to be engaged in the business of selling tangible personal property or taxable services for use in the state if the seller enters into an agreement with one or more residents of the state under which the residents, for a commission or other consideration, directly or indirectly refer potential purchasers, whether by a link on an Internet website or otherwise, to the seller.

$10,000 Sales Threshold

However, this nexus presumption only applies if the cumulative gross receipts from sales by the seller to purchasers in the state who are referred to the seller by all residents with an agreement with the seller exceed ten thousand dollars ($10,000) during the preceding twelve (12) months.

Opportunity to Rebut Presumption

The presumption may be rebutted by submitting proof that the residents with whom the seller has an agreement did not engage in any activity within the state that was significantly associated with the seller’s ability to establish or maintain the seller’s market in the state during the preceding twelve (12) months.

Proof may consist of written statements from all of the residents with whom the seller has an agreement stating that they did not engage in any solicitation in the state on behalf of the seller during the preceding year if the statements were provided and obtained in good faith.

Act 1001 (S.B. 738), Laws 2011, effective 90 days after adjournment of the 2011 Legislature, and as noted

Separately State (Unbundle)?

In most states, when a taxable item is bundled together with a non-taxable item, the whole transaction becomes taxable.  Ouch!  If you didn’t know that, you need to take action now to “unbundle” your transactions and only charge tax on the taxable items.  This is general guidance.  You should consult the state’s laws for the state in which your transaction takes place to reach a final conclusion, as each state is different. 

Impacts Services and Tangible Personal Property

This not only impacts sales of tangible personal property, but also services.  You could have a taxable service bundled with a non-taxable service.  You could also have taxable tangible personal property bundled with a non-taxable service. 

So What?

Don’t wait until the auditor arrives to review your transactions and correct this.  Act now and mitigate your exposure.

The California Assembly introduced two bills this week aimed at remote retailers. 

Amazon.com Nexus - AB153

One bill (AB 153) is an Amazon.com nexus bill similar to New York, Rhode Island and North Carolina.  It is also similar to bills introduced in Illinois, Mississippi and New Mexico this year.

The bill changes the definition of a retailer engaged in business in this state to include:

any retailer entering into agreements under which a person in this state, for a commission or other consideration, directly or indirectly refers potential purchasers, whether by an Internet-based link or an Internet Web site, or otherwise, to the retailer, provided the total cumulative sales price from all sales by the retailer to purchasers in this state that are referred pursuant to these agreements is in excess of $10,000 within the preceding 12 months, except as specified.

The bill would further provide that a retailer entering specified agreements to purchase advertising is not a retailer engaged in business in this state.

Nexus Presumption and Notification Requirements - AB155

The other bill (AB155) would impose nexus presumption standards for members of commonly controlled groups, and impose notification requirements similar to those currently in effect and adopted last year by Colorado.

The bill would revise the definition of “retailer engaged in business in this state” to mean any retailer that has a substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon which federal law permits this state to impose a use tax collection duty. The bill would also include specified retailers as retailers engaged in business in this state and would eliminate an exclusion.

The bill would also require each retailer that is not required to collect use tax to provide notification on its retail Internet Web site and any catalog that tax is imposed on the storage, use, or other consumption in this state of the tangible personal property purchased from the retailer and is required to be paid by the purchaser, as provided.

The bill would require every person not required to register with the board that sells tangible personal property the storage, use, or other consumption of which is subject to use tax to file a report with the board regarding those sales, as specified. The bill would also require those persons to annually send a notice to each purchaser showing the total amount of purchases made by that purchaser in the prior calendar year and informing the purchaser of the obligation to file the appropriate use tax returns, as prescribed. The bill would impose specified monetary penalties for failure to comply, while excluding from these requirements persons whose receipts from those sales do not exceed a specified amount.

What’s Next?

Its only January 21st, and we have had four states introduce Amazon.com legislation (IL, MS, NM and CA).  The “use tax” gap is a problem in every state, and Amazon.com nexus is an easy target as a solution.  Amazon.com nexus is just a way of collecting use tax that is already due to the state.  Unfortunately, there are negative side effects that occur for individuals and businesses that operate in affiliate programs. 

With states budgets in crisis mode, states will be looking at cutting expenses, increasing taxes and increasing incentives for businesses to expand in their state and/or create jobs. If budget pressures continue to increase, new governors and state legislators may have no choice but to overlook protests from individuals and businesses that operate in affiliate programs, and adopt Amazon.com nexus standards. 

Keep watching to see what’s next.

The following is a brief list of some ideas that might apply:

Nexus and FIN 48: At this time of year, it is a good time for companies to address their nexus position in advance of their FIN 48 analysis. Operations may also be able to be restructured in advance of 2011. If your company or client utilizes telecommuting employees or independent contractors and hasn’t addressed their nexus position in a while, this may be a good time. Also, more states have adopted economic nexus standards and “bright line” nexus standards that may come into play.

Sales and Use Tax: It is also a good time to conduct a reverse sales tax audit to identify sales and use tax refund opportunities and potential exposure. If your company or client has started to sale items over the Internet, we should talk. If your client has purchased any software, SaaS or cloud computing recently, they may want to confirm there is no sales or use tax exposure.

Income Tax: For C corporations, a reverse income tax audit could identify state income/franchise and gross receipts tax refund opportunities and potential exposure. Combined reporting and apportionment issues or opportunities may exist.

Income Tax: For flow-through entities, a reverse income tax audit may be helpful on major states such as Texas, Michigan, Washington, Pennsylvania, etc.

Credits and Incentives: If your company or clients are entering into new states, hiring new employees, building new facilities, retaining employees, “going green,” involved with renewable energy, etc. this is a good time to identify and capture credit and incentive opportunities.

Transaction Due Diligence: If your company or clients are entering into any acquisitions of other companies or assets, state and local tax issues should be reviewed to determine exposure, successor liability, and nexus impact.

Residency Issues: For individual tax clients that have changed their residency to another state or are considering such a change, guidance should be provided in regards to what records they need to maintain, etc.to support their residency or domicile.

Employee Misclassification: If your company or client utilizes a high volume of independent contractors, contracts should be reviewed to mitigate exposure of those independent contractors being reclassified as employees.

If you would like assistance with any of the above, please contact me.

Here’s the excerpt from Amazon’s 10-Q filing:

In September 2010, the State of Texas issued an assessment of $269 million for uncollected sales taxes for the period from December 2005 to December 2009, including interest and penalties. The State of Texas is alleging that we should have collected sales taxes on applicable sales transactions during those years. We believe that the State of Texas did not provide a sufficient basis for its assessment and that the assessment is without merit. We intend to vigorously defend ourselves in this matter.

Apparently, Amazon operates a distribution center in Texas, but the distribution center is owned by a subsidiary and not the Amazon entity that sells goods online.  Therefore, Amazon has argued that the online company does not have nexus in Texas.  Texas seems to disagree.
 
Amazon has been under attack for the past few years with New York, North Carolina and Rhode Island and their “Amazon.com nexus” laws.  In addition, other states like Colorado have tried to make their compliance requirements so burdensome that out of state “non-collecting retailers” will voluntarily collect sales tax on their sales. 
 
Stay tuned for the continuing saga.
 
For more info on Amazon’s “trials and tribulations,” check out another article by TechFlash.
 
Also, check out my other posts on Nexus.

To provide guidance to taxpayers, Connecticut released an “Informational Publication 2010(29).”  The publication provides answers to several questions taxpayers have about the application of Connecticut’s economic nexus standard. 

According to the publication, the purposeful direction of business activities toward Connecticut will be evaluated based on the frequency, quantity and systematic nature of the business’s economic contacts in Connecticut.

The publication also provides taxpayer examples and a “bright line test.” 

A company, partnership or S corporation that is not otherwise subject to income taxation or a requirement to file a return in this state under Chapter 208 or Chapter 229 of the Connecticut General Statutes shall not be deemed to have economic nexus for a taxable year if the frequency, quantity and systematic nature of the business’s economic contacts with the state are such that it has receipts from business activities that are less than $500,000 attributable to Connecticut sources during such taxable year. This bright line test does not preclude the Commissioner from contending that a company, partnership or S corporation has an obligation to file a return or pay a tax under Chapter 208 or Chapter 229 of the Connecticut General Statutes as a matter of law other than attributable to the Economic Nexus Legislation. Note: The determination as to whether a pass-through entity, including, but not limited to, partnerships and S corporations, satisfies the bright line test shall be made at the entity level.

Regardless of the economic nexus standard, it is important to remember that Federal Public Law 86-272 does provide protection to businesses that have economic nexus in Connecticut against Connecticut taxation.  According to the publication, P.L. 86-272, 15 U.S.C. 381-384, restricts Connecticut from imposing an income tax on income derived within its borders from interstate commerce if the only business activity of the business within Connecticut consists of the solicitation of orders for sales of tangible personal property, which orders are to be sent outside Connecticut for acceptance or rejection, and, if accepted, are filled by shipment or delivery from a point outside Connecticut. P.L. 86-272 protection is not afforded to transactions other than sales of tangible personal property. In addition, P.L. 86-272 does not apply to taxes that are not based on income.

Example: Catalog Corp., an out-of-state corporation that is not otherwise subject to Connecticut income taxation, remotely solicits (i.e. by mail and telephone) orders for the company’s tangible products from Connecticut customers. Sales are approved and shipped via common carrier from outside Connecticut. Although Catalog Corp. may have a substantial economic presence within Connecticut, it is nevertheless immune from Connecticut income taxation pursuant to P.L. 86-272.

As stated in other posts, the “economic nexus” standard is a growing trend among states.  If you have questions how this standard impacts your business, please contact me.

Brian Strahle is State and Local Tax Practice Leader at Baker Tilly Virchow Krause, LLP, in addition to being the Founder and Author of LeverageSALT, the State and Local Tax Blog at http://www.leveragestateandlocaltax.com/. He can be reached at brian.strahle@bakertilly.com.

State tax laws regarding nexus continue to change either through legislation or interpretation by the courts; therefore, it is very important to gain an understanding of nexus, and to determine what states your company has a filing obligation or tax liability exposure.

NOTE: Steps can be taken to mitigate this exposure.

What is “Nexus”?

Nexus, in simple terms, is having a taxable connection or presence with a state.

Why Should I Care?

If you are a corporation, pass-through entity (i.e., LLC, partnership S corporation), nexus will determine what states the entity is required to file returns and pay tax. If you are a partner, member of an LLC, or a shareholder of an S corporation, the nexus determination affecting the entity within which you own an interest, will determine what states you file in as an individual (in addition to your state of residency).

What is the Problem?

As you might expect, there are different nexus thresholds for different types of taxes (i.e., income tax, sales/use tax, gross receipts taxes, etc.). As with just about every state tax issue, there is also a lack of uniformity among the states regarding nexus which creates complexity and confusion.

“Old School Nexus”

“Old School Nexus” as I like to call it, is physical presence nexus. In other words, a company would only have nexus in a state if the company had a physical presence in the state.

This appears to have become “old school” now, since states are considering companies with the following activities to have nexus in their state:

1. Using independent contractors, affiliates or others in a state.
2. Having a web-link to your site on an affiliate or unrelated party’s website in a state.
3. Having customers who hold your company’s credit cards in a state.
4. Licensing intangibles to related or unrelated parties in a state.
5. Having sales in a state over a certain threshold.
6. Having payroll in a state over a certain threshold.
7. Having a certain percentage of your total sales, property and payroll in a state.

These are just a few examples. There are many more (trust me).

The “New Nexus”

The “New Nexus” (vs. “Old School Nexus”) is apparently for the “New Economy.” In other words, the “New Nexus” does not require having a physical presence in a state.

For example, selling items over the Internet can create “Amazon nexus” (as discussed in a previous post), and “exploiting the market in a state” by expending effort (without a physical presence) to generate income from customers in a state can create “economic nexus.”

As a side note, “Amazon nexus” applies to sales and use tax, and “economic nexus” appears to apply to income taxes, gross receipts taxes and business activity taxes.

NOTE: not all states apply the “new nexus” rules, but many are proposing legislation or strongly considering adopting the “new nexus” rules.

What Does This Mean For You?

States are experiencing a deep financial budget crisis and therefore, have been changing their laws and proposing legislation to balance their budgets, resulting in higher taxes or new taxes in some cases. In addition, more and more states are looking to tax out-of-state companies with the slightest presence in-state, as economic nexus and Amazon nexus become more acceptable or challenged without success.

As a result, I highly recommend businesses operating across the U.S. either physically or online, consult a state and local tax professional who can help you walk through the analysis and determine if you have nexus in certain states; or determine if any changes can be made to the way you do business to eliminate nexus.

Brian Strahle is State and Local Tax Practice Leader at Baker Tilly Virchow Krause, LLP, in addition to being the Founder and Author of LeverageSALT, the State and Local Tax Blog at http://www.leveragestateandlocaltax.com/. He can be reached at brian.strahle@bakertilly.com.

In basic terms, “nonresident withholding” is when a state requires a pass-through entity to withhold state income tax (or make a state tax payment) on a nonresident shareholder’s pro rata share of the pass-through entity’s income sourced to the specific state. In other words, it is a mechanism for states to better ensure that state tax will be paid by nonresident shareholders.

Now, if you or your client operates within a multi-tiered structure of pass-through entities, then nonresident withholding can become a compliance “nightmare” for both you and state taxing authorities. Most states have difficulty tracking nonresident withholding when it passes through multiple layers before it gets to the ultimate taxpayer. Therefore, state tax notices upon state tax notices can become an unwelcome, but familiar friend.

With that said, here are a few tips or questions to ask when dealing with nonresident withholding in multi-tiered structures:

1) Does the state require quarterly nonresident withholding on “actual payments/distributions” or on “allocated income”? To put it simply, some states only require quarterly nonresident withholding if a cash payment is actually made to a shareholder. If states don’t require quarterly nonresident withholding, most, if not all states require annual nonresident withholding on “allocated income” whether a distribution is actually paid or not.

2) Is nonresident withholding required to be done for all nonresident shareholders regardless of the type of shareholder? Meaning, is withholding required for C corp, S corp, partnership, LLCs, individual and/or trust shareholders?

3) Does the state allow or have a mechanism for nonresident shareholders to obtain a waiver or exemption from nonresident withholding? Meaning, can a nonresident shareholder provide the pass-through entity or the state with a document to keep the pass-through entity from withholding on its share of the state’s source income?

4) Is the nonresident withholding required to be done on a quarterly basis? Or can it be paid one time a year?

5) In a multi-tiered pass-through entity structure, at what level is nonresident withholding required to be done? Meaning, is the lowest entity required to do the withholding or does the state only require the entity before the ultimate taxpayer to do the withholding? This is a key question, because if it is done at the wrong level, it can cause great confusion and an explosion of notices between the state and the taxpayer.

Some of the top “problem states” when dealing with nonresident withholding are: California, Colorado, Indiana, Iowa, and Kansas. These are just a few. As I stated earlier, in a multi-tiered structure, nonresident withholding is a “tracking nightmare” for both the taxpayer and the state. Obviously, it requires meticulous record keeping to get it right.

Brian Strahle is State and Local Tax Practice Leader at Baker Tilly Virchow Krause, LLP, in addition to being the Founder and Author of LeverageSALT, the State and Local Tax Blog at http://www.leveragestateandlocaltax.com/. He can be reached at brian.strahle@bakertilly.com.

Under a proposed amendment, (N.J. A.C. 18:2-5.8, 42 NJR 56, 1/4/10), the New Jersey Division of Taxation would require taxpayers to submit “sufficient documentation” to allow the division to determine the rationale or basis for the refund to verify the amount of the refund before interest on an overpayment begins to accrue.

What Is “Sufficient Documentation”?

Not sure, but the proposed amendment states a taxpayer must attach documentation to the refund claim form indicating the basis for such claim. You cannot just say that “documentation is available upon request.”

In some cases, a taxpayer may need to include copies of each invoice where tax was incorrectly charged, and proof of payment of the entire invoice amount.

No More “Protective Refund Claims”?

The proposal would also not allow taxpayers to file protective refund claims. According to the New Jersey Division of Taxation, there is no statutory authority that requires the Division to allow protective refund claims.

If you have any questions or would like assistance with the filing of a New Jersey sales tax refund claim, please contact me at brian.strahle@bakertilly.com.
 
Brian Strahle is State and Local Tax Practice Leader at Baker Tilly Virchow Krause, LLP, in addition to being the Founder and Author of LeverageSALT, the State and Local Tax Blog at http://www.leveragestateandlocaltax.com/

If yes, do you send employees into Washington State to maintain your market in Washington State?

If yes, you could have nexus in Washington State for B&O tax purposes.

Are your goods shipped F.O.B.?

If yes, does the freight consolidator, freight forwarder or for-hire carrier have express written authority to accept or reject the goods for the purchaser with the right of inspection?

If not, the goods could be considered to be received in Washington State.

The above conclusions are what the Court of Appeals for the State of Washington Division II reached in Lamtec Corporation, Appellant, v. Department of Revenue of the State of Washington, Respondent; No. 37516-8-11.

Important Notes

Washington’s B&O tax is an excise tax imposed for the privilege of doing business. Therefore, virtually all business activities carried on within Washington are taxable.

Washington’s rules for interstate sales of tangible property state when goods originating outside of Washington are received by a purchaser in Washington, and the out-of-state seller has nexus with Washington, the B&O tax applies to the seller.

Facts:

• Lamtec is a company based in New Jersey with no permanent physical location in Washington State
• Lamtec sent employees into Washington State to maintain Lamtec’s market in Washington State, but not to solicit or accept individual orders
• All goods were shipped F.O.B. (from New Jersey)
• Lamtec Had Nexus

First, the Court held that Lamtec’s activities within Washington were “significantly associated with Lamtec’s ability to establish and maintain a market in Washington.”

Given Lamtec’s business strategy of maintaining long-term relationships with a small number of customers; its in-person customer visits were critical to maintaining its existing Washington customers.

Lamtec sent employees into Washington to provide information, listen to concerns about Lamtec products, participate in telephone calls that customers placed to Lamtec’s technical and customer service departments in New Jersey, field questions concerning potential price increases and new products, and maintain general client relations.

The Goods Were Received in Washington State.

The Court also held that the goods Lamtec sold to Washington State customers were received by the purchasers within Washington State despite the goods being shipped F.O.B.

According to Washington tax code (WAC 458-20-193(7)(a):

Delivery of the goods to a freight consolidator, freight forwarder or for-hire carrier located outside this state merely utilized to arrange for and/or transport the goods into this state is not receipt of the goods by the purchaser or its agent unless the consolidator, forwarder or for-hire carrier has express written authority to accept or reject the goods for the purchaser with the right of inspection.

Because the for-hire carriers in Lamtec’s case did not have express written authority to accept or reject the goods for the purchasers with the right of inspection, the Court held the goods were received in Washington.

Takeaway - Mitigate Exposure

If you are selling into Washington State without a permanent physical presence in Washington, you should review your activities in Washington and your shipping practices to determine your exposure to B&O tax.

Takeaway - Opportunity

After reviewing your activities in Washington and your shipping practices, you may be able to change your business practices to reduce your exposure to B&O tax going forward.

Click on the following link to access the case:

http://www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=375168MAJ

Brian Strahle
National state and local tax consultant
leveragesalt@earthlink.net

About the author: Brian Strahle is a national state and local tax knowledge and solutions consultant. He is founder and author at the widely-read state and local tax blog, LeverageSALT - http://www.leveragestateandlocaltax.com/. Strahle was previously Director of the National Tax office at RSM McGladrey.