Nexus Perplexus

States convince companies to pay taxes they may not owe. Also, cats hang out with dogs, fire falls from sky.

Paging Wile E. Coyote.

For decades, executives at The Risk Management Association (badus stuffus limitus) have been doing what they’ve always done: devising and selling training materials for credit- and risk-management lending professionals. The goal of the RMA (www.rmahq.org), which has been around since 1914, is a pretty simple one. Through education and training, it strives to help corporate risk managers keep nasty surprises to a minimum.

Then, out of the blue, an anvil got dropped on the RMA. In the early 1990s, the state of New York (taxus maximus) informed officials at the not-for-profit association that the group was being audited. According to representatives at the New York Department of Tax and Finance, the Philadelphia-based RMA met the standard for nexus (a physical presence) and therefore was required to pay back sales tax on purchases made by residents of the Empire State. Earlier, the RMA’s tax adviser had come to the opposite conclusion.

Eventually, managers at the RMA were able to negotiate a settlement with tax officials in New York. But wary of that anvil, the managers decided not to take any more chances; they hired an attorney to look at all other states with a sales tax to see if the RMA was at risk. The finding? ”Many states had fairly ambiguous laws on their books,” says Dwight Overturf, controller at the RMA. ”So rather than gamble, we decided to register with all states that have a sales tax — and to collect and remit those taxes.”

As Overturf soon found out, however, filing returns in all jurisdictions with a sales tax — 45 states, Washington, DC, and 6,000 local municipalities — can create a huge administrative burden. Just keeping up with constantly changing tax rates can tie up entire finance departments.

So, in 1999, managers at the RMA decided that they would automate the process. The group purchased Internet Sales Tax, a software package that was designed by Taxware International. The Taxware program ties into the RMA’s order entry system, providing tax rates for all relevant states, counties, and cities. Now, whenever an order is placed over the association’s Web site or by phone, the application immediately identifies where the customer resides, assesses the appropriate tax, and tacks that on to the invoice.

The Volunteer States

Not surprisingly, state authorities love programs like Internet Sales Tax, as well as other Web-enabled tax compliance software. While the 1998 Internet Tax Freedom Act did prohibit additional or discriminatory taxes being placed on ecommerce transactions, it didn’t eliminate sales tax on virtual purchases. If an online seller has nexus in a state, then that seller must assess, charge, and remit sales tax. If an etailer doesn’t meet the standard for nexus, then consumers are generally required to pony up use taxes on virtual purchases.

Fat chance. In fact, state governments, which get a third of their income from sales tax, are losing out on billions in ecommerce sales. Naturally, recouping some of that lost revenue has become a high priority for many state and local tax authorities. Thirty-eight states now support the Streamlined Sales Tax Project, a state government initiative to simplify ”sales and use tax collection for all types of commerce.”

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