When the term nexus comes up, concerns about sales tax immediately come to mind and while sales tax is certainly part of it, creating a nexus is so much more.
Let’s face it, we live in a different world today than we did just a few years ago and it’s not uncommon for us to have at least one client that operates in more than one state. The question that we are often faced with as practitioners is when is a nexus created?
To better answer this question, I want to tell you a story about the client that got away. First of all, I pride myself on being one step ahead of the next guy. But here is a case where I happened to be dead wrong.
I was reviewing a tax return for a potential new client. He had several state returns that were attached to the federal returns. When I asked the client why these states were attached, he said that he was registered as a foreign LLC in these different states. When asked why, he stated that his accountant told him that he had to register in those states because he had employees there.
I retorted slightly egotistically that having employees in a state didn’t create a nexus, even going so far as to put that into writing. The result was not only losing a potential new client, but I was also left with egg on my face. That’s what propelled me into boning up on what exactly creates a nexus, whereas before I had only read about in a Wall Street Journal article about Amazon.
It is important to point something out here: Whether a nexus is created or not is up to the particular state in which a business operates however, there are some rules of thumb. Obviously, if you have property or capital in a state, you have created a nexus.
For instance, let’s say that I am incorporated in Nevada and my office is in North Carolina. By virtue of the incorporation, I have a nexus in Nevada. Also, because my property is in North Carolina, I have established a nexus in NC.
Another rule of thumb, which I learned the hard way, is that having an employee out of state typically creates a nexus in that state. For instance, I am incorporated in Florida and have a W-2 employee in Indiana, thus I have created a nexus in Indiana.
What is the company’s responsibility once a nexus has been created? Again, every state is different, so check that particular state’s rules.
However, usually when a nexus is created, the company needs to register in the state as a foreign company. Once that has happened, then the requirement of filing a tax return, which again is left up to the state, is usually created. If I have sales in that state, then I may have an income tax liability, not to mention a sales tax liability provided that I have sales subject to sales tax in that state.
From a strictly compliance standpoint, I have stolen at least six clients from other accountant’s simply by knowing these rules. You could as well.
My advice to you is that now that nexus is a buzz word, and after reading this article, I am sure you have thought of at least one client that you have that has created a nexus. Now is the perfect time to learn all you can about nexuses. This is just the first in a series of articles that I will be writing to cover the many different facets of a nexus.
Craig W. Smalley, MST, EA, has been in practice since 1994. 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...