STATE & LOCAL
Sales and Use Tax: The Nexus Question

Nexus, also known as sufficient physical presence, is the pivotal factor in determining whether a company conducting business transactions in another state is required to collect sales and use tax on behalf of the state where those transactions take place. While there are some general guidelines that apply in determining nexus, there can be significant variations from state to state. Since 45 states and the District of Columbia impose a general sales tax (and the other five states exert taxing authority that could trigger nexus in some situations), nexus can quickly become a complicated issue.

Defining Nexus
According to the Sales Tax Institute, nexus is created if a company maintains a temporary or permanent presence of people (employees, service persons, independent sales/service agents) or property (inventory, offices, retail outlets, warehouses) in a state. A temporary presence may be created by sales or customer service representatives visiting other states to call on customers or prospects or to attend trade shows. Inventory consigned to an out-of-state warehouse may constitute a temporary presence in some states. In general, nexus is created once a substantial physical presence is established.

However, what constitutes a substantial physical presence is not always clearly defined by the individual states. Even when it is defined, conditions triggering it can vary widely, from as little as a single day in some states to various numbers of days in other states. Once a business entity has established a direct or representational presence within a state which meets that state’s definition of nexus, the state has the right to require the business entity to pay or collect and remit certain taxes, including sales and use taxes. Sales tax generally applies to retail sales of tangible personal property (and, in some states, services), while use tax applies to property that is used, consumed or stored in the state. They are mutually exclusive.

Uncertainties Abound
The state sales and use tax system currently in place is widely recognized as being antiquated, overly complex and unduly burdensome. More than 7,500 separate state and local jurisdictions levy some form of sales and use tax. Rates at which the taxes are levied and circumstances under which they apply can vary widely, not only from jurisdiction to jurisdiction, but even within the same jurisdiction. Not surprisingly, the question of nexus has led to numerous lawsuits—and a couple of landmark decisions—over the years, but it remains an area rife with uncertainties and ambiguities.

Many of these issues are addressed in the Streamlined Sales and Use Tax System (SSUTS), which is being supported by a growing number of states. However, even with widespread support for a simplified approach to sales and use tax issues, participation in SSUTS will remain voluntary in the absence of federal action by Congress or the Supreme Court. (For updates on SSUTS go to www.streamlinedsalestax.org.)

Tri-State Examples
For the time being, at least, businesses have to rely on their tax advisors for help in navigating the nuances of nexus determination. Local examples include:

• In New York, a single independent salesperson making sales on behalf of an out-of-state company can create nexus for that company, even if the company has no other physical presence in New York, and the salesperson is paid a straight commission and has no other obligations with the company. [TSB-A-03(41)S, November 19, 2003.]
• In New Jersey, a new law, which took effect September 1, 2004, requires out-of-state contractors and their affiliates to register to collect sales and use taxes as a condition of doing business in the state. [New Jersey Chap. 57 (AB3130).]
• In Connecticut, Dell, Inc. does not have nexus even though another company performs onsite repairs on Dell’s behalf for its customers in that state. [Dell Catalog Sales v. Commissioner of Revenue Services, Conn. Super Ct., July 10, 2003.]

For more information, please contact Carolyn Makuen at cmakuen@gellerco.com.

INDIVIDUAL
Basic Estate Planning Techniques
Part 2 in a Series

Effective estate planning is not just about minimizing taxes and making sure assets are distributed according to your wishes after death. It should also address issues that could arise in the case of a severe and/or prolonged illness or injury that leaves you unable to make rational decisions or to communicate with caregivers. Two documents that address those issues and should be included in any comprehensive estate plan are a living will and a healthcare proxy. Together, they constitute an advance medical directive. As was so dramatically illustrated by the Terri Schiavo case in Florida recently, the absence of an advance medical directive can lead to a multitude of problems.

Living Will
Sometimes called a healthcare declaration, a living will spells out the type and scope of life-sustaining medical treatment you want administered should you become terminally ill and unable to speak for yourself. Living wills are widely accepted by hospitals and other healthcare institutions; many now ask if a patient has a living will as part of the admissions process. In fact, medical facilities receiving Medicare and Medicaid funds are required by federal law (the Patient Self-Determination Act of 1990) to raise this issue with incoming patients.

While experts believe it is important for anyone over the age of 21 to have a living will, it is estimated that only about 20% of Americans have taken the time to prepare one. Among the important reasons to have a living will are:

• To maintain control over your medical care.
• To spell out your wishes regarding the use of “heroic measures” to keep you alive.
• To free spouses, children and caregivers from the burden of having to make difficult decisions that may be construed as moral dilemmas.
• To avoid the financial consequences that could result from prolonging life through artificial means for an extended period of time (only if the patient chooses not to be put on life support).

Health Care Proxy
This document (also known as a medical power of attorney or a power of attorney for healthcare) names a person to act as your agent in healthcare matters and authorizes such person to make medical decisions for you should you become incapacitated and unable to make them for yourself. While living wills should be as specific as possible regarding the type and scope of medical care you would like administered in various circumstances, it may be difficult or impossible to cover all possible scenarios.

This is an area of law administered by the individual states, and the strictness of interpretation of living wills can vary from jurisdiction to jurisdiction. According to the American Bar Association’s Commission on Legal Problems of the Elderly, living will instructions always require interpretation, even when the terminal nature of an illness is clear. By including in your estate plan a healthcare proxy that appoints someone to make life-or-death medical decisions on your behalf in the case of your incapacitation, you effectively remove the power of interpretation from the state and put it in the hands of someone you have personally chosen.

Related Issues
Some specialists in estate planning law recommend including a separate HIPPA (Health Insurance Portability and Accountability Act) authorization with a healthcare proxy to empower your agent to receive medical information about you. Although your healthcare proxy becomes effective when you are incapacitated, the stringent patient privacy rules HIPPA imposes on healthcare providers could make it difficult for your agent to obtain the medical information needed to invoke the healthcare proxy’s powers in the absence of a separate HIPPA authorization.

Finally, it is important to understand that a living will does not, in and of itself, constitute a “do not resuscitate” (DNR) order. The circumstances under which a person does not wish to be resuscitated must be spelled out in the living will, or a separate DNR document should be included as part of the advance medical directive package.

For more information, please contact Charlie Pomo at cpomo@gellerco.com.

FEDERAL
Software Review: Small Business Favorites

It’s rare when a start-up company, no matter what its size, does not implement at least one rudimentary business software system right out of the gate. For many, that means an off-the-shelf package to handle basic tasks such as banking, financing, managing customer information, tracking income and expenses, tracking and paying sales tax, preparing profit and loss statements, and gathering information and preparing reports to file income tax returns.

Intuit, Inc.’s QuickBooks program is the most popular choice, accounting for about 80% of the small business accounting software market. Other options include Best Software, Inc.’s Peachtree, and Simply Accounting programs. MYOB, Ltd.’s Account Edge and First Edge programs are popular with Mac users, and its Business Essentials version is a fairly recent entry in the Windows world.

QuickBooks: A Popular Choice
Most business software programs are offered in several versions; in the case of QuickBooks the options are Basic, Pro and Premier. Intuit also markets industry-specific versions for retail, services and manufacturing businesses. The Basic version is a good entry-level choice for those just making the switch from paper or spreadsheet ledgers. Pro lets users customize and email forms and reports, print shipping forms, and import and export Microsoft Excel data. The top-of-the-line Premier edition can generate purchase orders, budgets, forecasts and business plans for loan applications.

Peachtree: Ideal for Advanced Users
Peachtree Complete Accounting 2005 “isn’t for accounting wimps,” advises CNET software reviewer Jeff Bertolucci. It is more comprehensive than QuickBooks Pro in certain areas, such as inventory management, but QuickBooks is easier to use for non-accounting experts. The programs are similarly priced, but Bertolucci gives QuickBooks the nod in service support.

Simply Accounting Pro: 2004 vs. 2005 Version
A 2004 upgrade to Simply Accounting Pro that improved its interface and made it easier to use for first-timers won this program raves from software reviewers, who lauded it as an inexpensive alternative to QuickBooks. Praise for the 2005 version has been somewhat muted, however, due mainly to a tripling of the program’s price, putting it on par with QuickBooks. However, Simply Accounting Pro 2005 allows multiple users—up to six—while QuickBooks charges extra for that capability.

MYOB Business Essentials Pro: User Friendly
MYOB Business Essentials Pro includes an impressive accounting application with a user-friendly interface that walks non-accountants through basic bookkeeping chores, such as processing payroll and creating invoices. However, software reviewers at CNET recommend the 2005 version only as an upgrade to long-time MYOB users. Included third-party tools, such as a human resources database and an appointment scheduler, need better integration with the accounting application, according to CNET, making QuickBooks or Simply Accounting better choices for first-time users.

Outsource With Ease
All these programs do a good job of tracking tax-related information and generating the appropriate reports, and some include special features designed to make it easier for business owners to work with an outside accountant or tax preparer. An option for those who prefer minimal or no involvement on the software side is to outsource responsibility to specialist firms. Third-party firms can input data supplied by small business clients and run it on whatever software platform the client prefers. A firm such as Geller & Company offers cost-efficient online and software licensing solutions tailored to the needs of both emerging and established businesses.

For more information, please contact Laurie Caplane at lcaplane@gellerco.com.

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The information contained in TaxView is for general purposes only and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by Geller & Company to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs. Therefore, the information should not be used as a substitute for consultation with professional accounting, tax, or other competent advisors.