UNDERSTANDING NEXUS TO AVOID UNEXPECTED LIABILITYONESOURCE Indirect Tax The Tax & Accounting Business of Thomson Reuters

Presenter: NICOLE HUBERTYFebruary 7, 2013

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Today’s Agenda• Thomson Reuters Overview

• Key Definitions

• Legal Discussion

• Sales/Use Tax Nexus

• Potential Changes to Nexus

• Responsibilities When You Have Nexus

• Consequences - Not Being in Compliance

• What Now?

• Getting in Compliance

• Q & A

REUTERS

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THE THOMSON REUTERS ADVANTAGE

BUSINESS OVERVIEW:ONESOURCE INDIRECT TAX

• Thomson Reuters formed the ONESOURCE Indirect Tax product line from 3 renowned brands to deliver an end-to-end automated solution for managing the indirect tax compliance lifecycle:

TAX DETERMINATION: Sabrix (Sabrix, Inc. acquired by Thomson Reuters in December 2009)

SALES & USE TAX COMPLIANCE: ONESOURCE Sales & Use Tax

VAT COMPLIANCE: Abacus VAT

INDIRECT TAX SOLUTION OFFERINGDOMESTIC

COMPLIANCEU.S. AND CANADA

GLOBALTAX

DETERMINATION

VATCOMPLIANCE

Sales & Use TaxCompliance

RegulatoryCompliance

Consulting

TaxCertificateManager

Reporting

Sales & Use Tax,VAT Determination

Calculation

Global Tax Content & Research

ERP Integrations(i.e. SAP, Oracle)

Consulting Services

Reporting

Data import and consolidation

Working papers and data analysis

Manual adjustments

Returns, eFiling and reconciliation

Today’s Speaker

Nicole Huberty , JD

Lead Legal Analyst

• Responsible for researching and analyzing sales/use tax laws and regulations

• Corresponds with state and local tax authorities to monitor changes in sales/use tax rates and rules

• Law degree from University of Oregon

• Previously with Oregon Dept of Justice

Definition of Sales Tax and Use Tax

• Sales tax is a transaction tax on the retail sale of tangible personal property and selected services.

• Use Tax acts as a complement to the sales tax. While sales tax is assessed upon the retail sale of tangible personal property, the use tax is generally assessed upon the storage, use, or consumption of tangible personal property purchased at retail and upon which no sales tax was paid.

Definition of Nexus

Whether a company is required to collect sales/use tax is dependent on whether the company has nexus with the state

Nexus is the minimum connection or physical presence that must exist before a state can impose tax liability and reporting requirements on a company.

Poll Question

• How many states are you currently registered in?

Quill Corp. v. North Dakota504 U.S. 298 (1992)

US Supreme Court Decision

Conclusion: A State can not require an out-of-state vendor to collect sales or use tax unless the vendor has established a physical presence in the state

Facts: Quill’s Activities in North Dakota

• Mail-order vendor of office supplies• Quill had no office, warehouse, retail outlet, or other facility

located in North Dakota, nor were any Quill employees or sales representatives physically present in North Dakota

Quill Analysis

• State argued that physical presence should no longer be the defining point for nexus. With computers, satellite transmission, etc., a seller can do business almost anywhere without physically being present.

• The North Dakota Supreme Court ruled that Quill had constitutional nexus through its “economic presence”.

• The U.S. Supreme Court reversed the lower court’s ruling and reaffirmed physical presence nexus standard.

Substantial Nexus

The level of substantial nexus varies depending on the state.

Substantial NexusThe threshold for substantial nexus is dependent on the type of tax

– Sales Tax – minimal physical presence

– Income Tax – Public Law 86-272• Can have an employee or independent contractor if the

person is doing no more than soliciting sales of tangible personal property

• Sales orders must be accepted and fulfilled outside of the state

– It is possible to have nexus for sales tax purposes but not have it for income tax purposes

What constitutes a physical presence?Nexus refers to the links, connections, or contacts between a political jurisdiction and a taxpayer.

• Company-owned property• Company employees• Company agents

Company-Owned Property

• Where do you maintain a permanent and/or temporary place of business?

– Warehouse– Sales Office– Manufacturing Plant– Trade Show Booth– Sales Meeting– Training Site

What business activities give rise to sales/use tax nexus?

Company Employees

• Where do you have employees permanently and/or temporarily operating on your behalf?

– Sales People– Service People– Administrative Staff

What business activities give rise to sales/use tax nexus?

Company Agents: Where do you have agents operating on your behalf?

– Independent Agents– Affiliated Companies

What business activities give rise to sales/use tax nexus?

Poll Question

• Which of the following activities do you believe are creating your nexus exposure?

– Company-owned property– Temporary Locations (tradeshows, sales meetings, training sites)– Sales people– Company agents / Independent contractors– All of the above

State Threshold Nexus?

Massachusetts Regularly and systematically soliciting orders or otherwise exploiting the retail sales market

New YorkEntering into an agreement with a state resident under which the resident, for a commission or other consideration, refers potential customers to the seller

PennsylvaniaMaintaining a place of business, permanently or temporarily; and having an agent or representative, permanently or temporarily

TexasProviding taxable services through company employees, authorized repair or service agents, or independent contractors

Defining Nexus by State: Some Examples

How frequent are the activities within the state?

• Regular, systematic, on-going

• Infrequent, irregular, minimal contact

State Number of Days Nexus?

Arizona 3 or more

Michigan 2 or more

Minnesota 4 or more

How Frequency Impacts Nexus

General Concerns of Government

• States Concerns about e-commerce– Eroding tax base, lost tax revenues– Increased cost of administration

• Streamlined Sales Tax – Goal: Reduce the complexity for remote sellers so that Congress

will abolish the physical presence test.– If the physical presence test is eliminated, all sellers into a state

will be required to collect and remit tax.

Affiliate Nexus and Click-Through Nexus

• The Amazon laws aim to collect sales tax for internet sales from companies who otherwise lack sufficient nexus to require them to collect sales and use tax on their Internet sales. They’re named after the biggest online retailer that the law targets.

• Many states are starting to refer to these laws as “click-through-nexus” laws.

Amazon Laws – First Legislation

• New York – First to pass Amazon law in 2008

• North Carolina and Rhode Island– Passed similar versions in 2009

• Colorado and Oklahoma– Expanded nexus presumption for out-of-state retailers– Added noticing requirements

Nexus Legislation - 2011

• Arkansas– Affiliate nexus and click-through-nexus legislation signed

April 1, 2011

• Connecticut– Click-through-nexus legislation effective May 4, 2011– Lower gross receipts threshold

• Illinois– Click-through-nexus legislation effective July 1, 2011– April 2012: Law ruled unconstitutional

Nexus Legislation – 2011

• South Dakota– Affiliate nexus law expanding definition of nexus– Law includes notice and reporting requirements

• Vermont– Delayed implementation: Effective only after 15 other

states adopt click-through-nexus laws

Nexus Legislation – 2012

• California– 2011 Amazon legislation repealed for one year– Effective date: September 15, 2012

• Colorado– Direct Marketing Association v. Colorado DOR– March 30th: Permanent injunction blocking enforcement of

notice and reporting provisions of nexus law

• Georgia– Click-through-nexus legislation effective October 1, 2012– Higher gross receipts threshold: $50,000 annually

Nexus Legislation – 2012

• Pennsylvania– Pennsylvania Sales Tax Bulletin 2011-01, 12/01/2011– Remote e-commerce sellers to collect tax September 1,

2012

• Tennessee– Affiliate nexus bill signed March 23, 2012– Notification element

• Texas– Amazon legislation passed in 2011– Amazon started collecting tax July 1, 2012

Nexus Legislation - 2012• Utah and Virginia

– Affiliate nexus legislation– Expands types of sellers who are required to collect tax

• Arizona, Connecticut, Indiana, Massachusetts, Nevada, New Jersey, South Carolina, Tennessee, Virginia– Agreements with states to start collecting tax– Amazon to lobby for federal legislation

• Register and Collect Sales Tax: A retailer selling taxable goods or services within a state must register and collect sales tax on all taxable sales into the state

• Remit Use Tax: You must remit use tax on taxable purchases if tax was not charged by the seller

• File Returns: Remit the appropriate taxes in a timely manner

• Audit: Tax collection and returns are subject to verification by the tax jurisdiction

What are your responsibilities if you have Nexus?

Consequence of not Registering when you have Nexus

If a business has nexus within a state and does not register and pay the appropriate taxes, the business could face costly consequences, which include:

– Steep penalties

– Extensive interest

– Risk of being accused of fraud –especially if tax was collected and not remitted

– Extended look back periods for delinquent taxes

What Now?• Confirm and then document your business

activities within each state.

• If you have activity / physical presence within the state then determine the date of first activity.

• Determine your exposure for that period of time– How much tax should have been collected and remitted– At any time was tax collected?

• Determine the best way to get in compliance with the tax jurisdiction

Getting in Compliance• Self Register

• Register under an Amnesty Agreement

• Pursue a Voluntary Disclosure Agreement

Poll Question

• Does your company have a solid understanding of their nexus footprint?

– Yes– No

95% of Survey Companies Underestimate their Nexus Footprint

• A study conducted by ONESOURCE Indirect Tax found that 95% of companies surveyed underestimated their sales tax liability

• Surveyed customers ranged in size from $3 million to $170 million in revenue across a wide range of industries

• 85% of participating companies underestimated the number of states they needed to register in by more than 50%

• Mid-sized companies with customers all over the country were most likely to underestimate nexus and carried significantly more risk of audit exposure

Question & Answer

Contact Information

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ONESOURCE.Indirecttax@Thomsonreuters.com

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