Guidance Issued on Broader Seller Nexus Presumptions
In August of 2016, the Department of Taxation (the “Department”) updated its information release (“Nexus Release") detailing the standards the Department will apply in determining whether an out-of-state seller is required to collect Ohio use tax. Use Tax Information Release ST 2001-1, September 2001, Revised August, 2016. The changes in the Nexus Release are based on changes to the Ohio use tax nexus statute in Amended Substitute House Bill 64 (“H.B. 64” or “bill”), effective July 1, 2015. Prior to enactment of H.B. 64, the law provided examples of factual situations where an out-of-state seller had “substantial nexus” and was required to collect and remit use tax on behalf of its customers. The changes in H.B. 64 converted most of the previous list of examples to a list of activities that create a presumption that a seller has substantial nexus with Ohio. The bill also expanded many of the previous examples. The changes will likely result in more remote sellers being required to collect use tax.
The prior version of the Nexus Release described various examples of activities that created substantial nexus requiring an out-of-state seller to collect use tax. Those activities were typically conducted by the out-of-state seller, or certain other parties with which the seller had a close relationship, such as an affiliate, a franchisee, an employee, or an agent. Consistent with the statutory changes, the Nexus Release provides that sellers with the described activities are now presumed to have substantial nexus in Ohio and are required to collect use tax. The revisions also broaden the nexus-creating activities to include activities of any person, not just the seller or a party with a close relationship. The expanded presumptions include:
Use of an office, distribution facility, warehouse, storage facility, or similar place of business in Ohio by the seller or any other person other than a common carrier.
Use of any individual(s) for the purpose of conducting its business with the same or similar industry classification as the seller, selling a similar product or line of products as the seller, or using tradenames, trademarks, service marks, or trade names in Ohio that are the same or substantially similar to those used by the seller.
Use of any person other than a common carrier to: 1.) receive or process orders; 2.) use the person’s employees or facilities in Ohio to advertise, promote, or facilitate sales; 3.) delivering, installing, assembling, or performing maintenance services; 4.) facilitating the seller’s delivery by allowing property to be picked up at the person’s business. An example describes an in-state person that assembles pre-fabricated furniture for an out-of-state seller where the buyer contracted with the seller for the assembly.
The out-of-state seller has an agreement with an Ohio resident(s) where the resident receives commissions or other consideration for directly or indirectly referring potential customers provided the seller's cumulative gross receipts from sales to consumers referred to the seller by all such residents exceed $10,000 in the preceding twelve months (“click- through nexus”).
The Nexus Release retains the existing language that nexus exists when the out-of-state seller makes regular deliveries into the state through means other than a common carrier or rents, leases, or offers upon approval property to customers in Ohio. An out-of-state seller is also presumed to have nexus with Ohio if it is affiliated with a person that has nexus with Ohio, unless one of the safe harbor provisions applies. Out-of-state sellers are also now required to collect use tax before selling property or services to a state agency. Consistent with the H.B. 64 changes, a seller that registers in Ohio is not presumed to have substantial nexus and the Nexus Release removed that factual situation from the list.
The Nexus Release indicates that an out-of-state seller can rebut the presumption of click-through nexus by showing that each Ohio resident engaged by the seller to refer customers to the seller did not engage in an activity that was significantly associated with establishing or maintaining the seller’s Ohio market in the preceding twelve months, such as by submitting sworn written statements by the Ohio resident that the resident did not engage in any solicitation for the seller during the period.
Nexus through any of the other factual situations may be rebutted by demonstrating that the activities conducted by an out-of-state seller or on the seller’s behalf are not significantly associated with establishing and maintaining the seller’s market in Ohio.
The Nexus Release retains most of the existing safe harbor activities. However, while several of the retained de minimis safe harbors were conditioned on the seller having $25,000 or less in gross sales in the previous twelve months, for purposes of click-through nexus, the updated Nexus Release provides that the gross receipts threshold for each of those de minimis safe harbors is $10,000 or less.
Out-of-state sellers should review their operations and consider whether their activities fall within the expanded nexus guidance. Sellers which fail to collect and remit use tax are responsible for the tax if the buyer did not pay the use tax. Over the past few years, the Department has invested significant resources, through data mining, to identify taxpayers who are not properly complying. As a result, the chances of being audited have significantly increased. Further, the Department has recently instituted a 15% penalty for these types of audits. To avoid an audit and penalties, such sellers may want to consider a Voluntary Disclosure Agreement (“VDA”) to reduce any prior exposure. A VDA is a process where a taxpayer comes forth voluntarily to pay the delinquent tax. Sellers that qualify for the program can reduce their exposure by eliminating penalties and limiting the numbers of years at issue compared to situations where a seller is contacted for audit.