Agency Nexus: What is it and what to do if you have agents
Contrary to popular belief, you don’t have to have an office, warehouse or employee in the state to be required to register to collect tax. Companies can create nexus many different ways including through the use of agents.
Nexus is defined as sufficient contact with a tax jurisdiction that requires the taxpayer to register and collect sales/use tax. The responsibility for collecting and remitting the sales or use tax is usually upon the vendor. A company must determine in which states (and some localities) it has sufficient nexus that would require it to register to collect tax. Most states contend that once nexus is established, the seller has the responsibility for collecting sales tax, unless the transaction qualifies for a statutory exemption.
Agency nexus is established when a company contracts with an independent sales agent who travels into a state on a regular basis or a service company that provides services on the company’s behalf. For example, a sales agent that works in a state to solicit sales for a company is most likely creating nexus. Also, a company is creating nexus if it sells repair services and sub-contracts the services out. Although these agents may not be employees of the company, they can create nexus. As a result, the company will be required to register and collect tax in those states.
As a manufacturer, what is your obligation to register to collect and remit tax if you use an agent in a state where you have no other requirement to collect tax? If a seller engages in either of the following activities, the state will contend that nexus has been established: (1) maintaining an office, distribution house, warehouse, or similar place of business within the state; or (2) having a service representative, agent, or salesperson operating within the state. As is the case with sales tax nexus, exceptions could apply.
If you find that your current business practices correspond with the agency scenarios described above, you may need to explore the requirements of the state(s) involved and proactively register for sales and use tax collection. Taking this step could save you the expense and work required if the state investigates your company for agency nexus before you address the problem.
For more information about nexus, download the Windward Tax free nexus webinar.