Earlier this month, Ohio’s Department of Taxation released an update describing the standards the Department of Taxation will apply to determine whether an out-of-state seller is required to collect Ohio's use tax. The Department prepared the update to reflect changes in the fiscal year 2016-17 Operating Budget set forth in House Bill 64.
The update incorporates the Ohio Revised Code’s definition of “substantial nexus.” The term means that a seller has contact with Ohio sufficient to allow the state to require the seller to collect and remit use tax on sales of tangible personal property or services made to consumers in the state.
Generally speaking, an out-of-state seller is subject to Ohio’s use tax collection duty when he engages in any of the following activities:
- Using an office, distribution facility, warehouse, storage facility, or similar place of business within this state, whether operated by the seller or any other person;
- Regularly using employees, agents, representatives, solicitors, installers, repair people, salespeople, or others in Ohio for the purpose of conducting its business, or either engaging in a business with the same or a similar industry classification as the seller selling a similar product or line of products as the seller, or using trademarks, service marks, or trade names in Ohio that are the same or substantially similar to those used by the seller;
- Using any person, other than a common carrier acting in its capacity as a common carrier, in Ohio for any of the following purposes:
- Receiving or processing orders of the seller's goods or services;
- Using that person's employees or facilities in this state to advertise, promote, or facilitate sales by the seller to customers;
- Delivering, installing, assembling, or performing maintenance services for the seller's customers;
- Facilitating the seller's delivery of tangible personal property to customers in this state by allowing the seller's customers to pick up property sold by the seller at an office, distribution facility, warehouse, storage facility, or similar place of business.
- Making regular deliveries of tangible personal property into Ohio by means other than common carrier;
- Being affiliated with a person that has substantial nexus with this state;
- Owning tangible personal property that is rented or leased to a consumer in this state, or offers tangible personal property, on approval, to consumers in this state.
An affiliated person is defined as any person that is a member of the same controlled group of corporations as the seller or any other person that, regardless of the form of organization, bears the same ownership relationship to the seller as a corporation that is a member of the same controlled group of corporations.
The update points out that even if a seller itself does not have substantial nexus with the state, any affiliated person of the seller, before selling or leasing tangible personal property or services to a state agency, must register with the tax commissioner in the same manner as a seller.
The update provides this example to illustrate what nexus can look like:
Company A sells pre-fabricated furniture that [needs] to be assembled. Company A has no physical presence in Ohio, but hires a third party that is well-versed in its product. Customers may purchase through Company A, the third party home or business location assembly of Company A’s product. Because the third party is in this state and performs a service for seller’s customer, Company had nexus with Ohio and is subject to the use tax collection responsibility.
The following activities, when performed by or on behalf of an out of state seller create a presumption of the existence of nexus, subject to certain exceptions:
- Soliciting sales;
- Delivering property sold to customers in Ohio;
- Installing or supervising installation in Ohio;
- Providing repair, maintenance or warranty services in Ohio;
- Providing technical assistance or consulting services in Ohio, relating to such matters as engineering, design, quality control, production inspections, or the like;
- Investigating, handling or otherwise assisting in the resolution of customer complaints;
- Conducting training in Ohio;
- Soliciting, negotiating, or entering into franchising, licensing or similar agreements;
- Paying a commission to individuals located in Ohio for referring potential customers to the seller, if the cumulative gross receipts from the sales are more than $10,000.
A taxpayer can overcome the presumption of nexus by showing that the residents of Ohio who were engaged by the taxpayer did not undertake any activity that was significantly associated with the seller’s ability to establish or maintain the seller’s market in Ohio. The seller could also show that the activities conducted by the seller, or on his behalf, are not significantly associated with the seller’s ability to establish or maintain his Ohio market.
Here is an additional example, showing how timing can affect the nexus calculation:
On October 1, 2015, an out-of-state seller enters into an agreement with a resident of Ohio, where the resident receives a commission of 1% of related gross receipts from sales for referring potential customers to the seller by providing a link on the Ohio resident’s blog. The amount of Ohio gross receipts of the out-of-state seller equals $75,000, $10,000 of which is related to the resident receiving a commission on December 15, 2015. The out-of-state seller would be required to obtain a seller’s use tax permit, collect tax on taxable sales made to consumers in this state, and file returns and remit the appropriate tax beginning on December 15, 2015, and would include all sales made for the entire month of December 2015.
The update contains further information pertaining to registration, filing requirements, and the like.
The Great Lakes State released its own update addressing its Nexus Standards for Business Taxes. A 6 percent corporate income tax is levied on all corporations if:
- It has a “physical presence” in Michigan for more than one day;
- It “actively solicits” sales in Michigan and has gross receipts of $350,000 or more sourced to Michigan; or
- It has an ownership or beneficial interest in a flow-through entity (directly or indirectly through one or more flow-through entities), which has substantial nexus in this state.
Michigan defines “physical presence” as the following:
[A]ny activity conducted by the taxpayer or on behalf of the taxpayer by the taxpayer's employee, agent, or independent contractor acting in a representative capacity. Physical presence does not include the activities of professionals providing services in a professional capacity or other service providers if the activity is not significantly associated with the taxpayer’s ability to establish or maintain a market in Michigan.
Active solicitation includes, but is not limited to, solicitation through:
- The use of mail, telephone, and e-mail;
- Advertising, including print, radio, internet, television, and other media, and;
- Maintenance of an internet site over or through which sales transactions occur with persons within Michigan.
A seller who sells tangible personal property to a purchaser in Michigan is presumed to have nexus with Michigan if the seller or a person, including an affiliated person, other than a common carrier acting as a common carrier, engages in or performs any of the following activities in this state:
(a) Sells a similar line of products as the seller and does so under the same business name as the seller or a similar business name as the seller;
(b) Uses its employees, agents, representatives, or independent contractors in this state to promote or facilitate sales by the seller to purchasers in this state;
(c) Maintains, occupies, or uses an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery or sale of tangible personal property sold by the seller to the seller's purchasers in this state;
(d) Uses, with the seller's consent or knowledge, trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller;
(e) Delivers, installs, assembles, or performs maintenance or repair services for the seller's purchasers in this state;
(f) Facilitates the sale of tangible personal property to purchasers in this state by allowing the seller's purchasers in this state to pick up or return tangible personal property sold by the seller at an office, distribution facility, warehouse, storage place, or similar place of business maintained by that person in this state;
(g) Shares management, business systems, business practices, or employees with the seller, or in the case of an affiliated person, engages in intercompany transactions related to the activities occurring with the seller to establish or maintain the seller's market in this state;
(h) Enters into an agreement, directly or indirectly, with one or more Michigan residents under which the resident, for a commission or other consideration, directly or indirectly, refers potential purchasers, whether by a link on an internet website, in-person oral presentation, or otherwise, to the seller, if both of the following conditions are satisfied:
- The cumulative gross receipts from sales by the seller to purchasers in this state who are referred to the seller by all residents of this state with an agreement with the seller are greater than $10,000.00 during the immediately preceding 12 months; and
- The seller’s total cumulative gross receipts from sales to purchasers in this state exceed $50,000.00 during the immediately preceding 12 months.
(i) Conducts any other activities in this state that are significantly associated with the seller's ability to establish and maintain a market in this state for the seller's sales of tangible personal property to purchasers in this state.
As in Ohio, any presumption of nexus is rebuttable by showing that an activity is not significantly associated with the seller's ability to establish or maintain a market in Michigan.