Determining Nexus – The Perpetual Problem

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Nexus is generally defined as a connection or relationship with a state that subjects an entity to its income and/or sales tax laws.   As with most tax law, determining nexus is becoming more complex.  Historically nexus has been established by a physical presence.  A physical presence can be established via an employee in the state, inventory, real and/or tangible property in the state and the rental of a facility

 

Most clients in this day and age are operating or selling in various states.  The majority of my clients are located in NJ or NY and have some out of state activity. As states budgets continue to suffer, out of state questionnaires continue to be sent out in an effort to catch non-compliant taxpayers.  States would rather collect taxes from out of state businesses than domestic entities.  This approach reflects the reality that it is politically more appealing to collect taxes from out-of-state corporations than to raise taxes on in-state business interests.   

 

The establishment of nexus is evolving and states are trying to tax a myriad of transactions.  Internet transactions have been an area that states have focused on to try and raise revenues. Another movement in the nexus area is the concept of economic nexus.  This is the ability to tax an entity who derives economic benefit,  such as gross receipts,  from a state rather than who has established a physical presence.

 

The determination of nexus and the subsequent filing responsibility is a tough area for accountants to practice in.  We want to advise our clients to abide by the law but also do not want to overburden them with compliance costs and responsibilities.  As clients businesses go over state lines, we as their consultants, have a duty to inform them of  their filing responsibilities to stay compliant.  In order to do this, we have to stay on top of these ever changing laws that will most definitely become more complex with these difficult economic times. 

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llc operates in MA. one of the investors (not an active member) lives in PA. Do we need to file in PA?