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Global Marketing

An Ounce of Prevention (Planning for Nexus)

Benjamin Franklin opined that an ounce of prevention was worth a pound of cure.  Although the quote originally related to fire safety its wisdom may be applied to any situation.  In our series we have defined nexus, given examples of how nexus may be created by marketing activities, and explained the financial impact of nexus.  The financial impact of nexus has two parts; we illustrated the cost of nexus when you are aware of and include it in your marketing plan, and the cost of nexus when it surprises you.

In our first post, we told you nexus is not inherently a bad thing.  It is a sign your business is growing and expanding and should be a sign of the health of your business rather than a portent of evil.  The ounce of prevention in this instance is to be well informed.  If your marketing plans involve selling, operating, or providing support in a state other than your home state, make sure you have added the question “what about nexus” to your checklist.

The rules for every state are different.  As a marketing professional your job is to build connections, not to understand complex and frequently changing tax rules.  The ounce of prevention to protect yourself against unplanned financial expenses: consult with an appropriate professional.  Some examples of appropriate professionals are Certified Public Accountants, attorneys who specialize in state and local taxes, or your company’s tax department if you are large enough to have one internally.

WHEN ALL SEEMS LOST

If you’ve stumbled upon this blog and only now realize that your long-operating business may have tax nexus in another state, do not fret.  Most states have amnesty and voluntary disclosure programs that can help you bring your business into compliance with a reduced amount of expense.  So don’t wait for a state tax authority to catch your mistake.  Hire an expert and get in front of this issue!

Thank you for your attention reading our abbreviated blog series on what marketers need to know about state tax nexus.  That fact that you took the time to read this means you are already ahead of the game.  Good luck building those connections!

Chris and Josh

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NEXUS RESOURCES ON THE WEB

If you’d like read more on this topic, there are a variety of online resources available (mostly commercial).  We’ve highlighted a few here.  Remember, however, no publication can substitute for the judgment of a tax professional who regularly deals with these issues and is familiar with the specific facts of your business.

The SBA is a federal agency serving entrepreneurs and small businesses.  Among other resources, the SBA maintains a website summarizing state tax and registration requirements.

The MTC is an intergovernmental state tax agency that, similar to the SBA, publishes useful links with information on state tax and registration requirements.

STS maintains one of the better nongovernmental websites with free and generally up-to-date content on the nexus requirements in each state.  Their site is supported by a variety of third party product vendors and service providers.

LOBBYING

State tax nexus laws are developing rapidly.  If you’d like to do more than comply but actually help shape these laws, there are many excellent advocacy groups out there, including:

The world’s largest retail trade association, the NRF is focused on sales tax reform among other major policy tenets.

The PMA is an advocacy group for performance marketing, a form of advertising in which the purchaser pays only when there are measurable results.  They support the interests of affiliate marketers, which we addressed in an earlier blog.

DMA is a trade association of “data driven” marketers (most commonly direct mail marketers) that seeks to reduce tax burdens on remote sellers.  DMA works both in Congress and the States on these issues and has also been the plaintiff is some high profile cases.

An influential industrial trade association whose opinion is well-respected by courts and legislatures alike.  They support taxation of businesses only when they are physically present in a state

(Missed our last post? Catch it here: Wag the Dog (A “Tail” of the Cost of Nexus) | Global Marketing Professor)

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Global Marketing

Wag the Dog (A “Tail” of the Cost of Nexus)

Many pundits say you should not let the “tax tail” wag the investment or financial dog.  However, if you have ever seen a large dog swinging its tail gleefully about, you certainly know the amount of unintended damage that may be done.  We absolutely agree.  Don’t let the tail wag the dog, but also don’t ignore the tail or you may lose something of value.  In our first post, we mentioned nexus could cause you to need to register, file returns, and pay taxes; in this post we will discuss the costs of these three activities and the costs of not being aware of nexus.

Register

When a business entity has activities in a new state the business may be required to file with the Secretary of State to register the business and receive the right to conduct business in that jurisdiction.  Typically, there is a fee for an initial filing plus recurring fees on an annual or biannual basis.  Registration typically includes filing a form with the state that lists key people in the organization and identifies an “Agent for Service of Process,” which is generally the person to contact in the event of a lawsuit.  Failing to register or file recurring forms may result in penalties and may cause legal headaches in the event of a lawsuit.

File Returns

There are two main types of tax returns you may need to file — income tax returns and sales tax returns.  As with registration, the requirements for filing income and sales tax returns vary from state to state.  Filing returns in a state other than your home state means having either an employee or an outside professional who understands the rules of the state.  Employees or professionals who understand the tax return rules of other states are not inexpensive.

With both types of returns, you need to make sure you respect the filing due dates.  Failing to file returns by the due dates may result in penalties and be costly, especially if the failures extend over many years.

Pay Taxes

Both income tax returns and sales tax returns typically require the payment of taxes when you file them.  With income tax returns, the taxes are paid by the company based on the activities they conduct within the state (or just the fact they conduct activities in the state).  With sales tax returns, taxes are paid by your customers and you collect and then pay them over to the state.  Failure to pay your income taxes or to collect/remit sales taxes could result in substantial penalty and interest charges.

The Long Tail

In marketing the “Long Tail” refers to niche products or services that may be attractive to ever-smaller segments of the market.  With taxes and returns, the “Long Tail” refers to the statute of limitations; the rules that prevent state agencies from opening up cases against delinquent taxpayers after a certain time has passed.  Unfortunately, the filing of the return (and the payment of any taxes) is the event that starts the clock running on the statute of limitations.  If you don’t file and pay, the limitations period does not start.  Not knowing about nexus thus could create a large (and perpetual) financial risk to your company.  If this happens your accountant may then require that you establish contingent liability reserves and they would be similarly perpetual.

We hope you will let your curiosity wag your interest over to our final post where we will discuss strategies for planning for the impact of nexus on your marketing plan and budget.

Christopher La Puma is a graduate of Stanford University, with a JD and LLM (Tax) from Georgetown University Law Center.  He has 18 years experience in domestic, state and international tax planning and controversy and is currently enrolled in Chapman University’s Executive MBA Program.

Joshua Applegate is the Director of Finance at IOS LLC where he manages accounting, finance, and human resources.  Before joining IOS Joshua ran his own tax and accounting practice for 9 years.  Currently Joshua is working on his MBA at Chapman University with an expected graduation date of May 2016.

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Global Marketing

To Be, or Not To Be (Creating Nexus part 2 of 2)

In the opening dialogue of Act 3 of Shakespeare’s Hamlet, the Prince ponders “To be, or not to be.  That is the question…”  While Prince Hamlet was contemplating whether to, theatrically, end his existence, in this post we contemplate the remaining four ways being a good marketer may, legally, create nexus.

To recap, the remaining four ways marketing activities may create nexus are:

  • Protecting your organization’s product image/placement
  • Providing services in a state
  • Owning real or tangible personal property in a state
  • Using marketing affiliates

Protecting Your Product Image/Placement

Suppose you are a wholesaler and your marketing plan requires your dealers to handle and display your product in a certain way.  So you hire an employee or agent to inspect dealer inventories and retail displays.  The activities of this employee or agent may create nexus if they are conducted outside your home state.

Providing Services in a State

Suppose you want to enhance the value of a product for your customers by providing add on services.  Perhaps you plan to provide temporary consulting services, such as managerial or research activities.  Maybe you offer to lease your employees to key customers or provide temporary staffing related to your product or service.  Or perhaps you are a packaged software company that simply wants to help its customers out now and then by throwing in data processing services or software programming/customization.  All these types of arrangements may create nexus.

Owning Real or Tangible Personal Property in a State

Consider the scenario where you decide differentiate yourself from your competitors by being able to deliver more efficiently.  To do so, you open a distribution center in a state where you do not do business, but that is centrally located to nearby customers.  Even though NEITHER you nor your customers are located in this central state, having property there may create nexus.

Consider another scenario where you loan a supplier your property, perhaps tools and dies.  You may not have any other presence in the state, but the presence of this tangible property (a type considered key to the manufacturing process) may be enough to create nexus.

Finally, consider the situation where you temporarily or permanently set up a showroom so customers or potential customers may look at and try samples of your product.  In some states, opening even a temporary display or sample room may create nexus even if no sales are actually consummated there.

Using Marketing Affiliates

Suppose you want to generate new revenue in a state outside your own, but you want to do it in a cost effective way that does not require a material investment.  With Affiliate Marketing, a business rewards one or more affiliates for each visitor or customer brought by the affiliate’s own marketing efforts.

As an example, consider a California retailer who wants to increase sales in Illinois.  The retailer places an ad on the website of a Chicago newspaper.  When a customer clicks on the ad, the “click-thru” is logged and if a sale is generated the retailer pays the newspaper a commission.  A number of states claim such arrangements create nexus even though there may be no ownership or agency relationship between the local affiliate marketer and the out-of-state seller.  So even the use of independent marketing affiliates can be troublesome.

We encourage you to be, rather than not to be, tuned in to our next post Wag the Dog (A “Tail” of the Cost of Nexus) | Global Marketing Professor where we discuss the impact of nexus on a marketing budget.

Christopher La Puma is a graduate of Stanford University, with a JD and LLM (Tax) from Georgetown University Law Center.  He has 18 years experience in domestic, state and international tax planning and controversy and is currently enrolled in Chapman University’s Executive MBA Program.

Joshua Applegate is the Director of Finance at IOS LLC where he manages accounting, finance, and human resources.  Before joining IOS Joshua ran his own tax and accounting practice for 9 years.  Currently Joshua is working on his MBA at Chapman University with an expected graduation date of May 2016.

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Global Marketing

Reach Out and Touch Someone (Creating Nexus part 1 of 2)

From the late 1970’s to the late 1980’s the Baby Bell’s and AT&T ran an advertising campaign reminding us to “Reach out and touch someone.”

This poignant campaign reminded consumers how important it is to keep in touch, a message not lost on marketers.  A marketer’s job is to build connections with customers, but how they go about this will determine whether nexus is created for their organization.

If marketers could magically sell goods and services without making connections with their customers they would be in GREAT shape. Federal law generally protects an organization from creating nexus MERELY because it has customers in a state.  The issue is how much of a connection can you make before nexus IS created?  Most states would argue only a little connection is needed (they want the tax revenues after all).  Unfortunately, the test for nexus isn’t as simple as whether you are physically present in the state and can “reach out and touch” your customers.

Over the next two posts we will discuss the following five ways marketing activities may create nexus:

  • Providing phenomenal customer service
  • Protecting your organization’s product image/placement
  • Providing services in a state
  • Owning real or tangible personal property in a state
  • Using marketing affiliates

PROVIDING PHENOMENAL CUSTOMER SERVICE

In every geographic market, there are likely to be competitors who offer similar or substitute products or services; a logical way for marketers to differentiate their organization and demonstrate value to their customers is to provide exemplary customer service.  Following are some examples of situations where providing exemplary customer service may create nexus.

Replacement or Repair

First, consider a situation where a customer outside your home state has a key piece of equipment provided by your company and the equipment malfunctions or breaks.  As part of your marketing philosophy of providing exemplary customer service, you may send an employee or other representative out to repair or replace the malfunctioning equipment (whether for a fee or not).  Even though your employee or representative is only in the state temporarily, this may create nexus.

Training or Retraining

Next, consider the situation where a customer outside your home state loses a key employee on short notice and that employee is responsible for operating the equipment or using the service you provide.  Of course your philosophy of providing phenomenal customer service dictates you help your customer (whether for a fee or not) by training a replacement employee.  If training this employee involves you sending an employee or representative to your customer’s place of business, this may create nexus.

Market Research

Finally, consider the situation where you have a key customer in another state and you want to conduct market research to determine ways you may add more value to the product or service you provide.  Because inconveniencing the users with surveys is not in line with your customer service or research philosophy, you send an employee or representative out to meet with them and ask questions about their use of (and satisfaction with) the product.  Even though your purpose for the trip is not related to your customer specifically, the presence of your employee or representative may create nexus.

Be sure to reach out and touch our next post To Be, or Not To Be (Creating Nexus part 2 of 2) | Global Marketing Professor, where we discuss the remaining four ways marketing activities may create nexus.

Christopher La Puma is a graduate of Stanford University, with a JD and LLM (Tax) from Georgetown University Law Center.  He has 18 years experience in domestic, state and international tax planning and controversy and is currently enrolled in Chapman University’s Executive MBA Program.

Joshua Applegate is the Director of Finance at IOS LLC where he manages accounting, finance, and human resources.  Before joining IOS Joshua ran his own tax and accounting practice for 9 years.  Currently Joshua is working on his MBA at Chapman University with an expected graduation date of May 2016.