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

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Craig W. Smalley, EA
Founder/CEO
CWSEAPA LLP
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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 Smalley

About 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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