Trying to decide whether your company should participate in an upcoming trade show? Here's one more factor to consider: some states require companies to collect sales or use tax on items sold at the show and/or to pay state income tax on the sales. What's more, if a connection, or nexus, with the state is created, that nexus could subject other parts of the business to the same tax treatment.
The nexus area in general is contentious, says David Colmenero, a tax lawyer in the Dallas office of Jones Day Reavis & Pogue and the author of a new report on the subject. "It's important for companies to understand that some states aggressively impose tax based on attendance at trade shows, while others offer a tax safe harbor."
Unfortunately, most state statutes on trade-show nexus are fuzzy, so interpreting the law may be cumbersome. But don't expect time to be on your side. Many states don't impose a statute of limitations, says Colmenero. In fact, "we've seen states assess taxes back to a company's date of incorporation or the beginning of the company's instate activities," he says.
Once trade-show nexus is established, a corporate ripple effect may soon follow. Indeed, once a company's connection to the state requires filing sales tax returns, all sales and shipments into the state, not just those resulting from the trade show, are generally subject to sales and use tax, notes Colmenero. "Similarly, for income tax purposes, the company's entire income may be subject to the state's income tax."
The Trade Show Exhibitors Association says its standard policy is to remind members to consider the tax implications of taking part in trade shows. However, Amy Mandel, the group's communications director, says she is not aware of any exhibitor ever choosing not to participate for that reason.
These states take a hard line on trade-show nexus.
- Illinois: One appearance at a show may be enough to create nexus for use-tax purposes.
- Massachusetts: Soliciting sales at a show for three or more days subjects vendors to use-tax collection.
- Texas: Based on a recent ruling, actual sales (as opposed to solicitation of orders) are subject to franchise tax.
Source: State Tax Return, Jones Day Reavis & Pogue, November 2001