A recent study by Sabrix, a provider of transaction tax management for companies of all sizes, revealed that 95 percent of companies underestimated their nexus footprint (nexus determines what business activities create sales tax liability in a state).

Sabrix conducted the study in the third quarter of 2009 with companies ranging in size from $3 million to $170 million in revenue, and across a wide range of industries including chemicals, consumer products, high tech, health care and life sciences, and professional services.

The study also found that 85 percent of participating companies underestimated the number of states they needed to register in by more than 50 percent. Mid-sized companies with customers all over the country were most likely to underestimate and carried significantly more risk of audit exposure, while smaller companies, who usually do business in a few states, also underestimate, but have lower non-compliance risk.

According to the Sabrix study, companies typically overlook:

Independent contractors. In most states, all it takes to establish nexus is an agent acting on behalf of the company.

Services. Performing services in a state—whether a single service in a year or 500—can create nexus.

Trade shows. Spending a single day at a show can create nexus even if the company does not sell anything (e.g. it is strictly informational).

“[W]hat is potentially concerning for companies is how quickly and aggressively revenue-hungry states are tightening up their sales and use tax auditing procedures given the current state of the economy,” said Carla Yrjanson, vice president of tax research for Sabrix. “Thus, companies who are unknowingly out of compliance face increased risk of audit, penalties, and interest, making sales and use tax a top priority for companies of all sizes.”

California, for example, recently conducted door-to-door visits to over 74,000 businesses in over 130 zip codes as part of the “Statewide Compliance and Outreach Program.” Dozens of other states are in the process of creating similar programs.

Online sales is another issue “further complicating sales and use tax,” added Yrjanson. “In New York, for example, the ‘Amazon tax’ already claims sales tax nexus through its affiliates and we expect other states to do the same.”

For more information on the Nexus studies results, or to find out how to conduct a Nexus study for your company, contact Sabrix at (866) 472-2749 or sales@sabrix.com.