Creating a Sales Tax Nexus Versus a Nexus for State Income Tax

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When I began this series, I explained what a Nexus was and when you need to create one, but do you know the difference between a nexus created for sales tax and a nexus for state income tax?

Let’s say that your client’s business sells mattresses in New York and have salespeople who travel to Connecticut, New Jersey, and Pennsylvania to sell mattresses. The mattresses are shipped from New York to those states. What kind of nexus have you created? 

Because their salespeople entered the states of Connecticut, New Jersey, and Pennsylvania, they have created a sales tax nexus. The question then becomes, do they have to register as a foreign company in those states, and are they responsible for income tax in those states? The simple answer is no.

Most states do not require you to register as a foreign corporation unless you have a “substantial presence” in that state. A substantial presence would be created if you had property, equipment, or the like in that state. Just because you had the oddball sale in Connecticut doesn’t mean you have to register in that state, nor does it mean you have to pay state income tax.

If you don’t have to pay state income tax, why do you have to pay sales tax? Very simply, you had salespeople enter those states and they made sales. If you had employees in that state, and your business was subject to sales tax, then you would have to pay sales tax on the sales, but not necessarily state income tax.

For instance, I have offices in Florida, Delaware, and Nevada. I have a nexus in those states. However, I have clients all over the country and I enter a lot of states to meet with those clients.

Sometimes, I make a sale in those states. But I provide a professional service, so I am not subject to sales tax.

If I was in a business where I was subject to sales tax, I would have to pay that tax in those states. But because I just happen to be in that state doesn’t mean I have to register in that state, and I am not subject to income tax in that state.

If I had employees working in another state, I would then be required to register as a foreign corporation in that state, be subject to sales tax on the sales in that state, and also be subject to income tax in that state.

Why? Because I have created a substantial presence in that state by having employees working there. The same would be true if I had subcontractors in that state.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice for almost 23 years. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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Oct 16th 2017 17:22

I think this is a very good topic to cover.

Years ago I was involved in a company that had to determine Nexus for various reasons in various states. I imagine things have changed since then, but back then simply having a computer server maintained in a state created Nexus for income/business taxes (and sometimes sales taxes).

Other times, simply having a person taking orders, without fulfilling them (the orders were "processed" elsewhere) didn't create Nexus.

It can be quite convoluted at times so again, I think the topic of this series is quite important. After all, we don't want to have to pay back taxes with all the penalties and interest...right?

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to Michael Abrams
Nov 7th 2017 14:51

After reading the article I am under the impression that the mere provision of services from your office in Florida to clients in other states does not create nexus in those other states for income tax purposes. That said, reading through many other articles, I get the distinct impression that that is no longer the case.

Is it not true that if you provide consulting services through your wholly owned LLC from your home state to a client in New York, New Jersey, Minnesota and who knows how many other states, that you have created a nexus in that state and are subject to income tax there even if you never left your home state? You have now derived service income which is enough in New Jersey. Other states say that if the services are received in their state then you are taxable there and the services will be deemed received in their state if the client office is in their state from where the services were requested. Other states just point to where the client invoices from.

Complicate that fact with the fact that your LLC is a Sub S and the wheels come off in terms of complexity.

Unless I am missing something, your simple statement that you are not subject to a state's income tax seems at best and oversimplification. I read one article where a single appearance by an out of state law firm in a New Jersey courtroom subjected that firm to income tax in New Jersey.

Seems to me that this whole topic is an enormous trap for the unwary. Would appreciate your thoughts.

Thanks (0)
avatar
Nov 7th 2017 14:51

After reading the article I am under the impression that the mere provision of services from your office in Florida to clients in other states does not create nexus in those other states for income tax purposes. That said, reading through many other articles, I get the distinct impression that that is no longer the case.

Is it not true that if you provide consulting services through your wholly owned LLC from your home state to a client in New York, New Jersey, Minnesota and who knows how many other states, that you have created a nexus in that state and are subject to income tax there even if you never left your home state? You have now derived service income which is enough in New Jersey. Other states say that if the services are received in their state then you are taxable there and the services will be deemed received in their state if the client office is in their state from where the services were requested. Other states just point to where the client invoices from.

Complicate that fact with the fact that your LLC is a Sub S and the wheels come off in terms of complexity.

Unless I am missing something, your simple statement that you are not subject to a state's income tax seems at best and oversimplification. I read one article where a single appearance by an out of state law firm in a New Jersey courtroom subjected that firm to income tax in New Jersey.

Seems to me that this whole topic is an enormous trap for the unwary. Would appreciate your thoughts.

Thanks (0)