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.