Dear Mike #4 - Please Answer My Sales Tax Questions
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat discuss some questions we have received from clients and listeners of our podcast. We are calling this episode “Dear Mike”.
Here’s a glimpse of what you’ll learn:
Is physical presence required for nexus?
If you have nexus for sales tax, do you have nexus for income tax?
What should you do if you meet an economic nexus threshold but have exempt sales?
Do employees working remotely create nexus for the company?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More, your go to resource for all things state tax related. Now, here is your host, Michael Fleming.
Michael Fleming: Hello everyone. Mike Fleming here, founder of Sales Tax and More and today's co host of the Sales Tax and More Podcast, where we talk about everybody's favorite topic, which is of course sales tax. And today we're going to, we've got a format called, we call Dear Mike. And that's where I answer questions that have come in from our clients or prospective clients, or just people who are interested in some answers about sales tax. And today we're going to concentrate those questions about nexus. But before we get started, [00:01:00] let me introduce you to my co host Ellie Moffat.
Ellie Moffat: Hey everyone. Great to be here. And I'm going to jump right into our normal introduction for Sales Tax and More. We are a full service consulting and solutions firm.
And we have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of sales tax returns, sales tax registrations, consultations, research, exemption certificate management, audit defense, and like our name states more.
So if you have questions about our services or you'd like to work with us, please reach out. We'd love to hear from you and we'd love to work with you as well. And what I forgot to say at the beginning of this is please also like and subscribe to this podcast. It helps us know we like it. It helps us move in the right direction.
So Mike is physical presence required for nexus?
Michael Fleming: I could answer every question you ever asked me with the the term. It depends. You're aware of that, [00:02:00] right? Okay.
Ellie Moffat: Our favorite kind of question.
Michael Fleming: So the answer to this question is it depends. It depends on what type of tax we're talking about. So for sales tax, the answer is no.
Physical presence was required prior to 2018. Now, what constituted a physical presence was in a lot, there was a lot of contention about that. States and taxpayers often had different ideas but as of the Wayfair case in 2018 the U. S. Supreme Court said that a physical presence is not required.
It can be based upon an economic presence, and an economic presence is generally defined as either a certain dollar amount of sales into a state or a certain number of transactions or a combination of both, as in the case of Connecticut and New York. Is a physical presence required for nexus for sales tax?
No not since [00:03:00] 2018. Is it required for income tax nexus? No, not since 1992. So the idea of an economic nexus has been around a lot longer for income tax than for sales tax. For other types of taxes, generally a physical presence is required.
Ellie Moffat: So if you have nexus for sales tax, do you have nexus for income tax?
Michael Fleming: Did you throw that question in there just because I mentioned the word income tax?
Ellie Moffat: Maybe or maybe it's one of our frequently asked questions. You'll never know.
Michael Fleming: All right. The answer to this one, the short answer is no. Let me rephrase that. Registering for sales tax is not going to give you nexus for income tax.
That's the short answer. But if you have nexus for sales tax do you have income nexus for income tax. It depends on the state, depends on what gave you the [00:04:00] nexus. So registering for sales tax, not going to give you income tax nexus, but the same activities that gave you sales tax nexus could also give you income tax nexus.
They're not always the same, and they're going to, differ from state to state. So in a state like New Jersey, they've just changed their income tax nexus. And they say that if you have $100, 000 worth of sales, or 200 transactions that's going to give you income tax nexus in the state of New Jersey.
That also happens to be their thresholds for sales tax nexus. So in a state like New Jersey, those are exactly the same. State like Hawaii, exactly the same. State like Washington, they don't have an income tax, but they have the business and occupation tax, which is a type of gross receipts tax, and it's the same type of nexus, but a [00:05:00] lot of types of physical presence could give you nexus for sales tax and not give you nexus for income tax and vice versa.
Now we said registering for sales tax is not going to give you an income tax nexus, but registering with the Secretary of State actually could give you both sales tax and income tax nexus in some states. And in some states it gives you neither. The answer as always is it's going to depend on the state.
Ellie Moffat: All right, thank you so much, Mike. Okay, next question here. What should you do if you meet an economic nexus threshold but have exempt sales?
Michael Fleming: It depends. So it's going to depend on the state, and it's going to depend on what type of business you're in. There are some companies out there that tell me, Mike we don't have any taxable sales. But in order to keep our licensing, we're a [00:06:00] regulated company. In order to do that, we have to be compliant with all of the laws in the state.
And if the state says we need to be registered for sales tax, even though we don't have taxable sales, we need to be registered for sales tax. So if you have nexus and you need to be registered for sales tax, and that's your situation, then I would go ahead and register. There are some states that say, if you don't have nexus or if you don't have any taxable sales, but you do have nexus, there's no reason to register.
There are other states that say, if you've got nexus, you need to register and you need to be filing $0 returns. Since the penalty for noncompliance is usually based on the amount of tax that's owed penalties and interest are based upon the amount of tax. There's not a whole lot of teeth in that, so most of our clients, if they don't have any taxable sales, are not going to [00:07:00] worry about getting registered in a state.
Now, there are a handful of states out there that say, even if it's a $0 return and you don't file it, if you were supposed to file it, it's a $50 penalty. Some of our clients don't think that's material. They still would not be registered. Other clients say, hey, state wants me to do it. I'm going to do it.
So bottom line is if you've got an if you've crossed an economic threshold and you have all exempt sales. The majority of the time, most of our clients are not going to register. They're not going to go through those extra expenses to file the zero dollar returns in order to do what the state says.
They're using some common sense. Just because the state says you should do something doesn't necessarily mean it makes good business sense to do so. There are good reasons to deviate from that, but in general, our clients are not going to register.
Ellie Moffat: Thank you [00:08:00] so much, Mike. Okay. And the next question here, I think is relevant for a lot of businesses.
So during, because during the pandemic, a lot of companies or a lot of employees are working remotely. And many have not gone back to the office. So what people are wanting to know is, does that create nexus for the companies?
Michael Fleming: It depends. So that's a that's the theme today. In general, the answer is yes, it's going to create nexus for you.
A lot of states out there have very low thresholds and during the pandemic they suspended this. Because everybody had to work from home, so they weren't enforcing this, but the pandemic, the drastic restrictions of the pandemic are long gone. And the states do consider this to be nexus creating.
And there are less than a handful of states out there that say what's the employee doing? But most states are like a Michigan that says if you have an employee in the state for greater than [00:09:00] 48 hours cumulatively throughout the year, then that's going to be nexus creating. Now, there are a few exceptions to that general rule, but by and large, if you live in a state, if you're working remotely from a state, you're going to be there for more than 48 hours.
Yes, the general answer here is that if you've got remote employees, you probably have nexus for sales tax and you could have nexus for income tax also.
Ellie Moffat: All right. Thank you so much Mike and thank you again for all of our listeners out there. Please like and subscribe if you like what you hear today.
And if you have any sales tax needs, we have for many solutions and services. We have this podcast, we have blogs, we have tax charts and matrices. We have We're regularly keeping up to date with what's happening in the sales tax world, and we're putting that out there. There's a lot of free resources.
We have webinars to offer CPE [00:10:00] credit. And if you have questions about our services, in addition to that, please reach out to me directly at emoffat at sales tax and more. com. That's E M O F F A T at sales tax and more. com. You can also visit our website, sales tax and more. com. And thank you again for joining us.
Thank you, everyone. And if sales tax is your favorite topic, then we hope to see you on the next installment of the Sales Tax and More Podcast. Bye bye.