Physical Presence Nexus Myths
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 debunk some myths about physical presence nexus.
Here’s a glimpse of what you’ll learn:
Does physical presence matter for sales tax anymore?
Myth 1: “I don’t have to worry about sales tax nexus if I am under the economic threshold”
Myth 2: “It’s never been a problem before and it won’t be a problem in the future”
Myth 3: “Registering for sales tax creates income tax nexus”
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: Hi, 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 gonna talk about physical presence nexus myths. But first let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hi everyone. It's great to be here. And for those who don't know about Sales Tax and More, we are a full service consulting and solutions firm. We have a really great team here [00:01:00] 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, audit defense, exemption certificate management, and like our name states more. So if you have questions about our services, please reach out. We'd love to hear from you and we'd love to work with you as well. And all that being said, Mike, let's talk about physical presence nexus.
So big question here. Does physical presence matter for sales tax anymore?
Michael Fleming: Absolutely. Physical presence is perhaps a bigger issue now even than economic nexus because economic nexus came about in 2018 for sales tax. For income tax, it goes back to 1992, but it's relatively new for sales tax, which is 2018.
So you can have seven and a half years of exposure for economic nexus. But for physical nexus, you may [00:02:00] have the past 20 years an activity. Maybe you have a subcontractor working on your behalf and you didn't realize that third parties can create nexus for you. So you got 20 years worth of exposure.
So yes, a physical presence does matter for sales tax at this point. And an economic nexus when it comes to sales tax does not protect you from any other type of nexus. As a matter of fact, it's going to trump at least when it comes to sales tax, it's gonna trump a physical presence almost universally.
I say at least when it comes to sales tax, because that's not always true when it comes from income tax. Sometimes an income tax, not all the time, but sometimes the economic nexus will trump the physical presence. Again, not all the time, it's the exception rather than a rule. But when it comes to sales tax, I don't know of any exceptions to the rule that the physical presence is gonna trump the economic [00:03:00] nexus.
Ellie Moffat: All right, thank you so much, Mike. So now that we've covered that, I wanna go through a few myths here. So the first myth I wanna talk about is I don't have to worry about sales tax nexus if I am under the economic threshold.
Michael Fleming: Yeah that's a big myth. That's a falsehood that relates to what we were just talking about and does physical presence matter anymore. Because economic nexus does not protect you from any other type of nexus. We just said that a physical presence is almost universally gonna trump an economic presence.
So I'll give you some examples. We have people call us up here we are seven and a half, eight years into this and we still have clients calling and saying, Hey, I want to deregister in the state of Texas, or I want to deregister in the state of California. And I say, how come? And they say we're underneath the $500,000 economic nexus threshold.
There are [00:04:00] no transaction thresholds. So I want to deregister. And since they're clients, I usually know a little bit about their business. I'll ask, last time we spoke you had an independent contractor coming into the state of Texas. Oh yeah, I still do, but I'm underneath the economic nexus threshold. Or in California, last time we spoke wasn't a huge part of your business, but you still had inventory in an Amazon warehouse. Oh, yeah, I still do, but I'm underneath the $500,000 threshold and at that point I gotta let 'em know, the economic nexus is not protecting you from anything else.
You still have a physical presence and that overrides the economic nexus. Unfortunately you still have nexus in these states, and the states want you to still be registered and collect their sales tax. So total myth.
Ellie Moffat: Okay, so next myth here, Mike. It's never been a problem before and it won't be a problem in the future.
Michael Fleming: Those are famous last words. Usually we get a call back as soon as [00:05:00] someone tells us this. I've been doing it this way forever, and it's never been a problem. Fill in the blank. I've been doing this for 20 years, 30 years. And it's just like speeding. It's never a problem until you get caught. Same thing here.
It's never a problem until it is. Even if you've been audited before, maybe this issue didn't come up. But if you're doing it wrong, maybe it comes up in the next audit. So it's never a problem until it is. And a lot of times people will say I'm doing it the same way as everyone else is doing it.
Sometimes everybody's doing it wrong. So this is a huge myth. It's famous last words. It's never been a problem before. It's not gonna be a problem in the future. The first part of that may be true. Never been a problem before. It's only because someone didn't make an issue of it. And if they do, it will be a problem in the future.
And to me, states, [00:06:00] they're not stupid. It just sometimes takes them longer to get around to something. Or maybe they had an auditor who wasn't knowledgeable or whatever else. Next time you're gonna get a knowledgeable auditor and they're going to catch it. In my opinion, it may be a little bit of work to change the way you're doing something or looking at something, but that's gonna be a whole lot cheaper than if the state figures out you've been doing it wrong.
And it can virtually put you outta business if the numbers are big enough. And when we're talking about sales tax and doing things. Maybe you haven't been even registered. In theory, the state could go back to the point you started doing business. Maybe that was 20 years ago.
In reality, they go back seven, eight, or 10 years. But even having said that I've seen where Texas, who normally says we go back seven years, try to go back 12 years. But even if they do only go back seven years, seven years worth of back tax plus penalty and [00:07:00] interest, we could add up to 50 to 60% of the back tax owed. Those can turn out to be enormous numbers.
Yes. This is a myth. It's never been a problem before and will not be a problem in the future. You've been lucky in the past. Do you believe you're gonna continue to be lucky in the future? I believe in Murphy's Law. Whatever can go wrong will go wrong, and it's not a matter of if, it's a matter of when.
So I believe that's a big myth also.
Ellie Moffat: Okay, and third myth here, Mike. Registering for sales tax creates income tax nexus.
Michael Fleming: Big myth. All right the activities for income tax are different than the activities for sales tax. Sometimes they're the same, sometimes they're different.
So you could have nexus for sales tax and income tax or you could have nexus just for income tax or nexus just for sales tax. But the registering for sales tax [00:08:00] does not automatically create income tax nexus. Now what it could do is trigger an income tax registration. And then you have to go to the state and say, Hey, we don't have nexus for income tax. Here's why.
And then they take that away. But it does not create the nexus for the income tax and it can be disputable. Now, registering with the Secretary of State, that's a whole nother issue. And when you go to register for sales tax, it makes it look like you may have to register with the Secretary of State.
That's not always true. If you have a pure economic nexus, that's never true and there's a workaround in every state. We see companies come to us all the time. They're registered in every state with the Secretary of State. We said, why'd you get registered with the Secretary of State? Oh, my accountant told me I needed to be registered.
We say, no. This creates a whole nother set of problems for you, a whole nother set of expenses. It's gotta be renewed every year. And it could subject you to income tax, so you wanna [00:09:00] deregister. Registering for sales tax nexus doesn't create an income tax nexus, but registering with the Secretary of State might.
And unless you absolutely have to, you wanna avoid getting registered with the Secretary of State. There are reasons why you would want to get registered, but just having an economic nexus is never gonna be one of those reasons. Big myth here.
Ellie Moffat: Alright. Thank you so much, Mike, for going over this.
If you have questions and you would like us to tell you if it's a myth or not, please reach out. We'd love to hear from you, and we offer a lot of solutions and services to help you out in whatever your problems may be regarding sales tax. You can reach out to me directly at E-M-O-F-F-A-T@salestaxmore.com. You can also reach out to us via our website, salestaxmore.com. And thank you so much for listening today.
Michael Fleming: Thank you everyone, and we do hope to see you on the next riveting episode of the Sales Tax More [00:10:00] Podcast. Take care everyone. Bye-bye.