At first glance, Nexus may not seem too intimidating. But, when applied to the context of taxes, it can be one of the most misunderstood, misinterpreted and underestimated issues in the business, leading to major tax problems.
To expand the definition for our purposes, I define Nexus as the minimum connection or link necessary, which allows a state to tax you or force you to collect taxes on its behalf. Because this minimum link varies from state to state and tax to tax and the rules get complex, CPAs and accountants must put in the time and effort to learn more about Nexus.
As you begin to take a deeper look, here are the top 10 Nexus survival tips to give you a better understanding and grasp:
- Do not Underestimate Nexus. Not knowing about Nexus can have a devastating effect on your clients and their company. If a state determines your client has Nexus, there is generally not a statute of limitations on how far back they can audit him/her. In theory, they can go back to the date you started to do business in the state, although in reality, they usually stay in the seven to 10 year range. But, seven to 10 years is still a long time, obviously. Then, not only can you end up paying back taxes, but they also tack on penalty and interest as well. The dollars can start to add up quickly, especially if the states share information. In some extreme cases, criminal penalties may also apply.
- Educate Yourself. As your client’s trusted advisor, it’s your calling to know Nexus in and out, so that you can keep your clients out of hot water. Learn about Nexus and see how it applies to a company’s operations. Stay abreast of Nexus changes, as well as changes in your clients’ businesses. There are a number of resources that are available, but free webinars are a good place to start. There are also a handful of firms that can help.
- Do not Assume Your Clients are OK. Just because your clients have not been contacted by a state, it doesn’t mean they are OK. They may be OK, or it may mean that the state just hasn’t found them yet. Some common ways states find your clients are through audits of their vendors or customers, disgruntled employees reporting them, or their competitors turning them in.
- Do not Assume You Fully Understand Nexus. As the CPA or accountant, you are usually good at what you do. But, CPAs often don’t focus on state and local taxes, and some of those that do only focus on a handful of states. You may be surprised to learn that some CPA’s knowledge of multi-state nexus issues are no better than your clients. Your clients have every right to question you about how much work you do in this area. How do you stay on top of the evolving issues in each of the states? Be a great Nexus resource for your client, or fall further behind.
- Do not Assume Your Client’s Employees are Keeping Them Compliant. Clients should be asking how you and your employees or co-workers stay abreast of Nexus changes. Do you monitor operations and see how changes in the way you do business impact nexus? How do you educate themselves? Who do you go to for answers or clarifications? Are you giving clients the tools that they need? If you have doubts, consider doing a Nexus consultation and analysis. It can be done internally or by a third party.
- Do not Assume Your Clients’ Competitors are Approaching Nexus Correctly. This is a perfect example of something my father told me over and over: “Just because everyone else is doing it doesn’t make it right.” Maybe your clients’ competitors have it right, but maybe not! Maybe, they just haven’t been discovered yet. This may become a case of the blind leading the blind. How do your clients know that their competitors are not following them? Where are their competitors getting their information? Educate yourself on this very important aspect of Nexus.
- Do not Stick Your Head in the Sand. If your clients have Nexus, they do not wait for the state to find them. The longer your clients wait, the greater their liabilities grow, as there is no statute of limitations. The second reason is that there is a program called a Voluntary Disclosure Agreement (VDA), where states offer to entice your clients to come forward. The VDA program usually limits the period a state will look back to three to four years, and encompasses waiving penalties and/or all or part of the interest. The drawback is that if the state finds your clients before they come forward, they are usually not eligible to participate in the program.
- Do not Answer a Nexus Questionnaire Without Fully Understanding Your Client’s Exposure.When a state becomes aware of your clients, they will usually send out a questionnaire about their activities in the state. Before your clients answer the questionnaire, you should not only understand what their exposure is, but also, what options are available. Once your clients return that questionnaire, their options may be limited.
- Go Beyond the Realm if Your Clients Have Nexus. This may seem counterintuitive, but remember that there is no statute of limitations if your clients have not filed the monthly returns. Once your clients come forward and get registered, they’ve lost the one small advantage and leverage they had. The state now knows who they are, and the state can go back and audit them for all the past periods. You will definitely want to look at a VDA or amnesty program.
- Do not Panic. If you think your clients might have Nexus, or have been contacted by a state, do not panic. There are programs your clients can take advantage of and a handful of firms that can help. Your clients are neither alone nor unique. Your clients can rest assured that many others have had the same problems. It’s your obligation to make sure that you can fix the problem and are the firm for them. Just remember not to ignore this issue. Not only does it not go away, but it also gets worse with time.