Nexus. It’s a word that causes anything from extreme anxiety to a disquieting unease for many tax professionals today. With many states setting increasingly aggressive sales and use tax nexus standards (sometimes of questionable constitutionality) it’s understandable why many tax professionals are so worried about their company’s potential nexus exposure. After all, the consequences of not paying taxes to a state in which you rightfully have nexus can be quite severe. What if your company is suddenly held liable for millions of dollars of sales tax for sales into a state that you always assumed your company didn’t have nexus in? It’s the kind of thing that can keep a CFO up at night.
That said, there are occasions when rightful worry can turn into outright paranoia. I’ve heard stories of companies simply registering in all 45 states without doing any research or having a nexus study performed because they would rather “be safe than sorry.” While certainly it’s not a bad idea to always keep tax exposures in mind, it isn’t necessarily wise to add such a huge administrative burden to your tax department without first analyzing if it’s actually necessary. As aggressive as many states are in setting nexus standards, each state is still bound by its own laws and regulations and these should be carefully analyzed before assuming that any company has sales and use tax nexus.
Another factor to consider is whether a state even requires certain companies to register for sales and use tax at all, regardless of nexus. Nexus concerns often cause manufacturers to begin registering in a state only to find out that registration isn’t even necessary. For example, many states such as Wisconsin and Illinois don’t require out-of-state wholesalers to register for sales and use tax at all. Registering in such states won’t require the remittance of any taxes, but it will require the filing of returns and states will usually be happy to charge you a penalty for any filings that are missed, even if no taxes were due.
Overall, it is certainly important that companies pay close attention to ever-changing nexus laws and make sure that they are properly registered in any states in which they have nexus and registration is required. But it’s equally important to not panic. It may be possible to only register in a few additional states and still sleep well at night.