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TAX

A standard first document convince the state otherwise. Submitting a letter
alongside the yes/no form in these circumstances to
for a state taxing authority explain the answers is often the best way to provide
the nexus information in the format required by a
state while still providing clarifying details to help
to send a business that mitigate exposure.
Some states will accept a letter describing the
business’s activity in lieu of the nexus questionnaire
it thinks may have nexus form sent by the state; however, some states require
that the form be filled out and returned even if a
separate letter describing its activities is also sent.
with a state is a nexus If a state requires the nexus questionnaire form be
filled out and returned and the business does not
inquiry letter. return the form, the state may automatically take
the position the business has nexus with the state. If
a business that is already registered fails to submit
the nexus form, the state may take the position the
company had nexus before its registration date. Not
areas the state can “help” the business become all states inform the business of the consequences of
compliant. The questionnaires typically consist of not completing the form.
“yes/no” questions, sometimes with small areas to If a questionnaire is not returned and the state
provide fuller responses. Businesses must be aware taxing authority determines a business has nexus,
that the answers they give on nexus questionnaires it could make an estimated assessment based on
could lead not only to additional exposure for sales the information it has at that time and ignore
and use tax but also provide the state evidence that information the business later provides to show
the taxpayer may be liable for numerous other tax its actual sales are below the state’s threshold
types. for economic nexus. The state can also impose
In responding to the nexus inquiry letter, some a higher interest rate (usually called a penalty
states require the company to use the questionnaire interest rate) plus penalties on the assessment.
form the state sends. This is problematic because Some states take the position the penalty interest
a one-size-fits-all form can produce inaccurate rate and penalties cannot be waived. Although
responses. Each business has unique circumstances this may seem extreme, a case of this type is being
that must be taken into account in determining litigated in one state.
whether it has nexus with a state. A question with
a “yes/no” answer may not tell a business’s whole BE READY TO PROTEST OR APPEAL
story and can provide a false indication of tax Keep in mind the state likely initiated contact with
liability. Once a state believes there is a liability, it the business based on information the state already
can be challenging to overcome that perception and possessed. Some states are refusing to turn over this

IN BRIEF exposure not only for sales and use service, moved it there. This issue
tax but also for other types of taxes. may decrease in importance going
■ If a state taxing authority believes that Consider submitting a letter alongside forward.
a business might have sales tax nexus the requested “yes/no” responses to ■ A company that believes it has been
with a state, typically it will send a prevent misinterpretation. wrongly charged an assessment has
standard nexus inquiry letter to gather ■ The biggest issue recently for many ways to challenge the assessment.
information about the business. businesses has been whether nexus In addition, a company can mitigate
■ Businesses must be careful in exists in states where inventory is its overall tax exposure by making
responding to this letter because present because a fulfillment service a voluntary disclosure with a given
the answers could trigger additional provider, such as Amazon’s FBA state.
To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.

8 | Journal of Accountancy September 2022