How to Conduct a Nexus Self-Audit
Catalogers can’t reduce their nexus exposure unless they first identify their nexus risks. Many CEOs and CFOs are unaware of their own company’s various affiliate marketing programs, cross-promotion initiatives, vendor drop-ship relationships and other activities that carry a nexus risk.
Senior managers also may be lulled into the false belief that a relatively small amount of in-state activity isn’t enough to cross the nexus threshold. Even a very limited physical presence in a state, however, may be sufficient to create a tax-collection obligation on all sales to consumers in that state.
Therefore, every cataloger should undertake a nexus self-audit. Attorneys and accountants familiar with this process have developed nexus questionnaires for that purpose. To identify potential nexus-producing activities, your self-audit must examine all major business functions including:
• sales and marketing;
• order processing;
• product acquisition;
• fulfillment; and
• outsourcing agreements.
The self-audit also should review the ownership structure and business relationship of affiliated companies to determine whether they’re sufficiently separate to avoid treatment as a single entity for sales/use-tax collection purposes.
Once the survey is completed, a tax professional can evaluate the marketer’s nexus profile and recommend measures to reduce the company’s tax exposure.