Posted By James Sutton & Jerry Doninni on Jul 7, 2012 11:22am PDT
ANSWERS TO YOUR FLORIDA NEXUS QUESTIONNAIRE CONCERNS
The days of only major corporations having to deal with tax laws in multiple states has practically vanished in today's world. Even the smallest of companies have been able to sell goods (and services) to anyone, anywhere over the internet. The tax laws of any particular state can rarely be described as simple, but a business can usually find a good accountant or lawyer that at least knows the tax laws of the one state where your business is located. However, even the smallest of companies that sells goods or services in multiple states has to keep up with state and local tax laws in a practically infinite number of jurisdictions. For example, DID YOU KNOW THAT THERE ARE OVER 1,100 SALES TAX JURISDICTIONS IN THE UNITED STATES? While every one of those taxing authorities wants you to pay tax, there are constitutional limitations placed on states and local governments that limit when and how the state or local government can to comply with its particular laws. A NEXUS QUESTIONNAIRE is a state's way testing to see whether you will admit to something that will allow a state to have power over your company.
At the our firm, we often deal with companies that operate in multiple states and local jurisdictions. The question often comes up as to whether a business is required to collect, remit, and/or report sales and use and corporate income tax in a state. We explain to the multi-state business it turns on whether you have a "nexus." In a typical meeting we often get the same look I get when I tell a friend or relative that I am sales tax attorney—blank stares. Several times business owners or other professionals will ask, "What is a "Nexus"?" It has become evident to me that most people, including tax professionals, are unfamiliar with what "nexus" means.
Nexus is a Latin verb meaning to connect or bind. The simplest explanation of nexus, in the state and local tax context, is whether a company has enough minimum contacts with a state to allow that state to legally 'bind' the company into complying with the laws of that state. If a company has those minimum contacts, then the company is said to have nexus with that state. Whether a state has legal jurisdiction over a company, is also subject to constitutional limitations that will be describe in more detail below. Applying that concept to a multi-state company in the sales and use tax setting, if a company has "nexus" in a state, then that company must register and collect sales and use tax on behalf of that state (assuming it is one of the 45 states that have sales and use tax). The truly daunting part of this issue is that if a state finds that you have nexus, then your company can be held liable for all the sales and use taxes that you did not collect in the past as well as all the penalties and interest that goes allow with it.
The next obvious question is what kind of activities creates "nexus?" Or put another way, what kind of activities would subject an out of state business to the responsibility of collecting and remitting tax in another state, such as Florida. Motivated by the goal of collecting as much revenue from an out of state vendor as possible, each state has slightly different statutory criteria as to what gives a company that minimum contact with a particular state. Generally, when a company has the following it MAY be considered to have nexus depending on that particular state's laws:
- Employees or contractors in state,
- Advertising in state,
- Delivery trucks in the state,
- Title to goods passing in the state,
- Solicitation in the state,
- Promotional activities in state,
- Owning property in the state,
- Attending conventions or seminars in the state, or
- Providing service (including warranty services) within a state.
If you have a state tax nexus questionnaire, then you'll notice many of the questions relate specially to these issues. In Florida, section 212.0596, Florida Statutes ("F.S."), states that a dealer has nexus if an out-of-state dealer engages in mail order sales and the dealer is:
- a resident or domiciled in this state,
- the dealer maintains business locations in this state,
- the dealer has agents in this state who solicit business,
- the delivery of goods is in Florida that fulfills a contract entered into in Florida,
- the dealer exploits the market by any media assisted advertising,
- the dealer consents to the tax, and a variety of other occasions.
Furthermore, if one of the owners or officers of the company resides in Florida, then the state may viably assert nexus over the company. In short, under current Florida law if a business is a Florida company or is an out-of-state company AND meets one of the above-requirements, then Florida's position is that the company has nexus and must register, collect, and remit Florida sales and use tax.
Whether the various state laws, including Florida law, are valid and enforceable is another issue. From a legal perspective, states have significant power to make rules that apply within their jurisdiction. The power of a state is only limited by the federal United States Constitution, the state's own laws, and how that state's courts interpret those laws. In the world of state and local tax, the constitutional limits are contained in the Due Process Clause and the Commerce Clause of the Constitution. In 1977, after decades of court decisions as to what this actually meant, the Supreme Court eventually decided under Complete Auto Transit v. Brady. 430 U.S. 274 (1977) that a state could tax a taxpayer if 1) the subject of the tax has "substantial nexus" with the taxing jurisdiction, 2) the tax does not discriminate against interstate commerce, 3) the tax is fairly apportioned and 4) the tax is fairly related to the benefits provided by the states.
As is readily apparent, whether a tax passes this four part test is always up for debate, especially in the modern economy. The only real bright-line rules are that if a company has some physical presence in a state then that company has nexus with that state. If a company is not physically present in a state, then it is open for debate. This principle was established
in the leading sales tax on nexus in Quill v. North Dakota. 504 U.S. 298 (1992). In Quill, Quill was an out-of-state office supply company that sold products to its customers in North Dakota using mail order catalogs. Quill had no outlets or sales representatives within North Dakota. The Court ruled that purely mail order transactions did not create nexus and some physical presence is required. Despite being 20 years old, neither Congress nor the Supreme Court have updated the law announced in Quill. Therefore, the current state of the law is if a company has "physical presence" in a state, then the company has nexus. Conversely, if a company's only connection with a state is mail order catalogs then it does not have nexus. Anywhere in between is up for in the preverbal gray area of the law.
Obviously, especially with the introduction of the internet, the current deliberation is what is "physical presence" in a state? While it seems pretty straightforward, this concept in application has been extremely difficult. For example, the New York court of Appeals ruled a company that sells wholesale goods to New York with the majority of its sales made through a catalog, has a few sales reps that travel to New York to call its wholesale customers, and has its goods shipped from a Vermont location has sales and use tax nexus. See Vermont Info. Processing Inc. v. Tax Appeals Tribunal, No. 139 (N.Y. 1995). In another example, Arizona has held that a one-day salesperson visit per year, 21 in state days per year by nonresident training personnel, and two computers creates nexus for a company. See Arizona Dept. of Rev. v. Care Computer Systems Inc.. 4 P. 3d 469 (Ariz. Ct. App. 2000). Finally, Kansas stated in In re Intercard Inc.. 14 P. 3d 1111 (Kan. 2000), that 11 visits in four years by a company to install data readers did not create nexus. It becomes readily apparent that each specific scenario is different and it is virtually impossible to tell if certain activities with give a company nexus within a jurisdiction.
As for Florida, the leading case is Florida Department of Revenue v. Share Intern'l. Inc.. 676 So. 2d 1362, (Fla. 1996), in which a Texas chiropractic supply company, with no offices or employees in Florida, sold chiropractic supplies through its mail solicitation office in Texas. However, for 3 days in the years 1986 through 1991 the company sent two of its agents to Florida to participate in a large educational seminar for chiropractors. The Florida Supreme Court concluded that these activities did not create nexus for the taxpayer.
What if a company has an affiliate, a server, or markets to customers in a state through the internet? As you can tell, this can get infinitely complicated. Under what has become known as the "Amazon Laws," "Click-Through Nexus," and under older theories such as "Economic Nexus," states are aggressively going after Internet activities by out of state vendors. Some states believe internet sales companies have nexus, other states take the position that online companies do not have nexus, and still in other states it depends.
What started as a relatively simple inquiry about a Florida Nexus Questionnaire has quickly spiraled out of control into exploring the rabbit hole of nexus. For the trained state and local tax attorney, the question of nexus is a very fact specific analysis that may not be simply answered easily. For the common business owner, determining whether its company has nexus is virtually impossible. Among other states Florida has been aggressive in sending out "Nexus Questionnaires" to various multi-state companies. It is unwise for a company to just blindly to respond to such a questionnaire without out least consulting a CPA or Attorney on the issue. Not responding to the questionnaire is unwise as it highly increases the chance of initiating an audit of your company. The best thing to do is give educated answers to the questionnaire that is truthful, but is tailored to lead the Florida Department of Revenue away from your company.
IF YOU ARE CONCERNED THAT YOU HAVE NEXUS OR EVEN IF THE NEXUS INVESTIGATION DEPARTMENT DETERMINED THAT YOUR COMPANY DOES HAVE NEXUS, THERE IS STILL A SMALL WINDOW OF OPPORTUNITY TO LIMIT THE NUMBER OF YEARS THE STATE LOOKS BACK IN TIME AND TO WAIVE THE PENALTIES. IF YOU ACT FAST, THEN WE USUALLY CAN GET A COMPANY INTO THE VOLUNTARY DISCLOSURE PROGRAM THAT LIMITS THE STATE TO A 3 YEAR LOOK BACK PERIOD. TO LEARN MORE ABOUT THE VOLUNTARY DISCLOSURE PROGRAM, CLICK HERE .
At the Law Offices of Moffa, Gainor, & Sutton, PA, we have decades of experience representing companies with multi-state tax issues and we are considered the experts in Florida sales and use tax matters. We offer a free initial consultation to discuss your issues and we would be glad to address your questions concerning the nexus questionnaire. If your company has exposure to Florida sales and use tax collection responsibilities for past years, then there are ways to limit your exposure and we can help.
MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM MOFFA, GAINOR, & SUTTON, PA. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.
MR. DONONNI IS A FLORIDA LICENSED ATTORNEY AND AN ASSOCIATE IN THE LAW FIRM MOFFA, GAINOR, & SUTTON, P.A. IN FORT LAUDERDALE, FLORIDA. MR. DONINNI'S PRIMARY PRACTICE AREA IS FLORIDA TAX CONTROVERSY. MR. DONONNI WORKED AS AN ACCOUNTANT FOR A PUBLIC REIT PRIOR TO LAW SCHOOL AND IS CURRENTLY PURSUING HIS LL.M. IN TAXATION AT NYU. YOU CAN READ MORE ABOUT MR. DONINNI IN HIS FIRM BIO.
§ 212.0596, Florida Statutes (Nexus statute)
Complete Auto Transit v. Brady. 430 U.S. 274 (1977)
Quill v. North Dakota. 504 U.S. 298 (1992)
Vermont Info. Processing Inc. v. Tax Appeals Tribunal, No. 139 (N.Y. 1995)
Arizona Dept. of Rev. v. Care Computer Systems Inc.. 4 P. 3d 469 (Ariz. Ct. App. 2000)
Florida Department of Revenue v. Share Intern'l. Inc.. 676 So. 2d 1362, (Fla. 1996)