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Tax Guide Template

What is Nexus?

Nexus is a requirement for taxation of interstate transactions under both the Commerce Clause and Due Process Clauses of the US Constitution. It is defined as a substantial physical presence in the state, but different states have different determinations for what qualifies as a substantial physical presence. Nexus is a determining factor in whether an out-of-state business (our out-of-country business) selling products or services into a state is liable to collect sales tax in that state. Factors to consider when determining nexus include maintaining employees or property (including inventory) within a state. However, a temporary physical presence can sometimes trigger nexus. Let’s look at a specific example: Pennsylvania.

Pennsylvania imposes a sales tax on the sales of tangible personal property and specified services within the state. This sales tax is required to be collected by the vendor who is doing business in Pennsylvania. Pennsylvania’s definition of doing business includes maintaining a stock of goods in the state.

Illinois imposes a retailer’s occupation (sales) tax on persons engaged in the business of selling tangible personal property to buyers for use or consumption and is measured by the seller’s gross receipts from such sales delivered to locations within Illinois. A retailer maintaining a place of business in the state includes having in Illinois, directly or by a subsidiary, an office, distribution house, sales house warehouse, or another place of business.

In general, maintaining inventory in a state will create sales tax nexus. However, until recently states did not have many methods to enforce these requirements on international companies. What has changed? As part of a broader effort to co-operate with state tax laws companies such as Amazon have been urging sellers to comply with state sales tax laws. Although Amazon cannot force international businesses to collect sales tax they can threaten to limit business activity with them if they do not comply.

How Does an International Business Comply?

Step 1 – Find an Expert.

The sales tax experts at Source Advisors are part of a group of service providers that are experienced in helping international businesses comply with complex sales tax laws without creating PE.

Step 2 – Determine if a Nexus Exists.

There are many factors that may create nexus and each state may apply those factors in a different manner.

Step 3 – Acquire a Federal Employer Identification Number.

This is complicated for international companies not desiring to establish a PE.

Step 4 – Register for a Sales Tax ID Number.

This is also complicated for international companies due to the information required by most of the applications, such as a US-based officer, and physical locations in the US.

Step 5 – Comply

Once you have a sales tax id number you are required to file monthly, quarterly or annual sales tax returns. You have several options and you can check out our COMPLIANCE section to review those options.

Step 6 – File Your 1120-F Protective Return

Source Advisors will assist you in working with a US-based CPA to assist you in filing the 1120-F.

Things to Avoid:

r&d amortization 2022 irs
Economic Nexus Calculator
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