Three is a Crowd: Third Party Nexus and How It Affects Your Company

By Meaghan Wingbermuehle

Nexus is the minimum connection with a state and business that requires the business to file and/or pay tax. Potential taxes include income tax, franchise tax, sales tax or other local taxes. In the past, a physical presence was the sure-fire way to create nexus. Currently, as states are trying to increase tax revenue, they are expanding what nexus means. This expansion of nexus undoubtedly increases the number of businesses who must file and pay taxes in their state. A third party that represents a business can cause nexus in a state in many ways, even if none of the business’ employees step foot in that state.

Third-Party Relationships Can Cause Nexus

There are many types of third-party relationships that potentially cause nexus in different states. A common third-party relationship that causes nexus is having an independent contractor in the state. These independent contractors can be soliciting sales, providing customer service, collecting receivables, among other actions. Additionally, even a vendor that drop ships on the company’s behalf can create nexus in another state. All of these third parties are performing work on behalf of a company, and therefore considered to be the company’s agent. States have been aggressively seeking to tax companies based on these scenarios.

Click-Through Nexus

Another type of third-party nexus is the “Click-through” nexus. This is the authorized use of a third-party to solicit sales. Usually this is done via the internet and web links. A company can pay a third-party to advertise the company’s products online and have a link to the website to place orders or contact. Based on the link-usage, the third-party usually is paid a commission for soliciting these sales. In many states, this activity creates “click-through” nexus and the company has a filing requirement and possible taxes owed to the state. Currently there are 20 states with “click-through” nexus laws in place, including CA, IL, ME, MI, MO, WA and many others.

How DHJJ Can Help

The activities of a third-party for a business are very common amongst companies. It is important to know how your business relationships with third-parties are affecting your tax liabilities and requirements. If you have any questions or would like more information, please contact your DHJJ accountant or the SALT (state and local tax) Team at 630-420-1360 or email Meaghan at mwingbermuehle@dhjj.com

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