State Tax Nexus: Everybody's Talking About It, but Why?
Do you know what states your business or your clients have a taxable presence in? Do you know what activities your business is conducting across the country? Has the activities your business conducts across the country changed?
State tax laws regarding nexus continue to change either through legislation or interpretation by the courts; therefore, it is very important to gain an understanding of nexus, and to determine what states your company has a filing obligation or tax liability exposure.
NOTE: Steps can be taken to mitigate this exposure.What is “Nexus"?
Nexus, in simple terms, is having a taxable connection or presence with a state.
Why Should I Care?If you are a corporation, pass-through entity (i.e., LLC, partnership S corporation), nexus will determine what states the entity is required to file returns and pay tax. If you are a partner, member of an LLC, or a shareholder of an S corporation, the nexus determination affecting the entity within which you own an interest, will determine what states you file in as an individual (in addition to your state of residency).
What is the Problem?
As you might expect, there are different nexus thresholds for different types of taxes (i.e., income tax, sales/use tax, gross receipts taxes, etc.). As with just about every state tax issue, there is also a lack of uniformity among the states regarding nexus which creates complexity and confusion.
“Old School Nexus”
“Old School Nexus” as I like to call it, is physical presence nexus. In other words, a company would only have nexus in a state if the company had a physical presence in the state.
This appears to have become “old school” now, since states are considering companies with the following activities to have nexus in their state:
1. Using independent contractors, affiliates or others in a state.
2. Having a web-link to your site on an affiliate or unrelated party’s website in a state.
3. Having customers who hold your company’s credit cards in a state.
4. Licensing intangibles to related or unrelated parties in a state.
5. Having sales in a state over a certain threshold.
6. Having payroll in a state over a certain threshold.
7. Having a certain percentage of your total sales, property and payroll in a state.
These are just a few examples. There are many more (trust me).The “New Nexus”
The “New Nexus” (vs. “Old School Nexus”) is apparently for the “New Economy.” In other words, the “New Nexus” does not require having a physical presence in a state.
For example, selling items over the Internet can create “Amazon nexus" (as discussed in a previous post), and “exploiting the market in a state” by expending effort (without a physical presence) to generate income from customers in a state can create “economic nexus.”
As a side note, “Amazon nexus” applies to sales and use tax, and “economic nexus” appears to apply to income taxes, gross receipts taxes and business activity taxes.
NOTE: not all states apply the “new nexus” rules, but many are proposing legislation or strongly considering adopting the “new nexus” rules.
What Does This Mean For You?
States are experiencing a deep financial budget crisis and therefore, have been changing their laws and proposing legislation to balance their budgets, resulting in higher taxes or new taxes in some cases. In addition, more and more states are looking to tax out-of-state companies with the slightest presence in-state, as economic nexus and Amazon nexus become more acceptable or challenged without success.
As a result, I highly recommend businesses operating across the U.S. either physically or online, consult a state and local tax professional who can help you walk through the analysis and determine if you have nexus in certain states; or determine if any changes can be made to the way you do business to eliminate nexus.
Please contact me at email@example.com to help you find your "nexus solution."
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.