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Sales tax nexus.

Forty-five states have jumped on the bandwagon with a sales or use tax on the sale or lease of property. For even modest-sized businesses, the administrative burdens of compliance are fast becoming almost prohibitive. Businesses must determine whether they are legally required to collect such a tax. If not, they must also ask themselves if they should collect the tax anyway to save their customers from the burden of self-assessing a use tax.

These types of controversies are promising to become more and more complex and costly to all businesses. One issue currently in the forefront is the question of "nexus." Nexus is the determination of what level of activity within a state taxing jurisdiction must be reached to be subject to that state's taxing authority. This issue is being litigated with mail order businesses and other businesses that have not commonly been considered as "doing business" in those states. The nexus determination generally falls into three categories.

1. States that require the seller to maintain a place of business within the state. 2. States that consider solicitation of sales by employees or agents within the state. 3. States that will tax sales that cross their borders, even if the seller has no property or employees in the state.

The majority of states are passing legislation shifting the taxation to the third category, thereby broadening the base of transactions that would be subject to the sales tax and easing the administrative burdens of enforcing compliance of the use tax. It also appears to put mail order companies on a more even sales and use tax footing with local business owners.

The case that is most frequently cited by corporations accused of not collecting sales tax is National Bellas Hess, Inc., 386 US 753 (1967), in which the Supreme Court ruled that a mail order house located in Missouri with no outlets or sales representatives in Illinois could not be required to collect Illinois use tax. Several state and local government associations are presently advocating the repeal of the National Bellas Hess restrictions and are changing their state sales and use tax laws to allow for the enforcement of the sales and use tax collection by out-of-state retailers. States are also pursuing the audits of mail order companies to encourage them to collect and remit sales and use taxes to the state taxing jurisdictions in which sales are occurring. One of the more recent cases, Quill Corporation v. North Dakota, N.D. Sup. Ct., 5/7/91 (which will be heard by the Supreme Court), has taken the position that mail and foreign order sales delivered into the state provided a sufficient presence to require the collection of that state's sales and use tax.

Another interesting trend in the sales and use tax area is to provide special exemptions in some jurisdictions for the purchase of certain types of personal property, such as manufacturing machinery and equipment; agricultural machinery, equipment and materials; pollution control equipment; and some casual sales. Several taxing jurisdictions offer significantly reduced rates or total exemption from the sales and use tax for many of these types of purchases.

Accounting practices and businesses should be aware of the risks and potential liabilities of nexus-related issues and should know when collection could possibly alleviate this risk or potential problem. It is also important to become familiar with the local tax jurisdictions' handling of those purchases that may be exempt or under a reduced tax rate. These purchases may then be structured in a jurisdiction so as to completely avoid (or reduce) being subject to sales and use tax.
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Author:Ness, Gary G.
Publication:The Tax Adviser
Date:Dec 1, 1991
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