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ALEI legal specialists were recently asked by a group of Maryland growers for some help answering the question of when and how they are subject to another state’s taxing authority for out-of-state deliveries. Although this sounds like a straightforward question, there’s no easy answer.
Although states differ in how they tax out-of-state companies doing business within their state, to be subject to another state’s sales tax, a company must have some type of physical or economic presence in the state assessing tax. This required physical or economic presence is referred to as the nexus, or substantial nexus. Examples of physical nexus is sending sales people into the state to solicit orders for products, or owning property in the state. If nexus exists, the out-of-state company may be subject to the other state’s sales tax.
Defining what is a sufficient minimal connection or nexus is not easy either; this is a continually evolving area of the law. To discern if your business is subject to a tax for out-of-state activities, you need to figure out how the taxing state defines nexus and compare that definition or standard to your businesses activities there. The best way to do this is by calling the state’s department of taxation or revenue and inquiring how the state defines nexus for the purpose of taxing out-of-state companies, or to hire a tax expert to do this research on your behalf. Even if nexus exists, however, sales tax may not be owed if the products are exempt. Some states exempt agricultural products from sales tax, so be sure to ask if there are any applicable exemptions for the product you are selling.
If a business has nexus for sales tax, it does not necessarily mean the company has nexus for income tax. The taxes (and any other taxes of the state such as franchise tax) must be analyzed separately. Federal statutory law (Public Law 86-272, codified at 15 U.S.C. §§ 381-384) prohibits a state from taxing income of an out-of-state company whose only business activities within the state consist of soliciting orders, provided the orders are sent outside the state for approval or rejection and the products are shipped or delivered from out of state by mail or common carrier. Actions such as providing services in the taxing state and delivering products into the state in company vehicles, however, can trigger income tax nexus.
States vary widely in how transporting goods into the taxing state affects taxation. Some states have adopted specific transportation nexus standards such as defining how many trips in and out of the state in a certain time period equal a nexus. Some states have adopted a transportation nexus standard for out-of-state companies which subject companies to tax when they deliver products other than by mail or common carrier into the state more than 12 times during a calendar year. Other states have left this area of taxation law largely undefined. If you make deliveries out-of-state, this is important information to record. In some instances delivery truck drivers are stopped at weigh stations and questioned about how many trips they have made in and out of the state--and the answers are used to impose tax liability.
With the recent advancements in technology, some states have also adopted affiliate nexus, sometimes referred to as “click through nexus” or “Amazon laws.” This type of sales tax nexus occurs when an out-of-state online retailer establishes nexus within a taxing state, through an agreement with one of its residents, to refer customers to the online retailer by a link on the resident’s website for a commission, generating revenue.
Given the complexity of tax nexus, if you conduct business across state lines, you should consult your attorney and/or tax expert and make sure you are aware of the potential tax liabilities.