Understanding Nexus: the Link Between State Taxes and Your Business
If you’ve been in business very long and have any connections to other states through online sales, out-of-state employees/contractors or travel to do work in other states, you’ve likely heard the term “NEXUS.” But what exactly is nexus, and what does it mean to your business?
Merriam-Webster defines “nexus” as a connection, link or a causal link.
Your business has nexus when you have activity that causes you to link to a particular state. Just one transaction one time in a state generally isn’t enough to create nexus – but it could be. As revenues drop, state tax departments are hungry for dollars and are reaching further and further to get that money.
WHEN DO YOU HAVE NEXUS?
Let’s look first at the simplest of situations (and forget the online world for a moment). Originally, you had to have a physical presence in a state like employees, property, or a location for you to be considered as having nexus. This definition still holds true. In most states any of the following creates nexus:
You have employees (or often even contractors) that work remotely for you.
You store inventory in a warehouse in another state.
You send employees to work temporarily in the state, including:
Short- or long-term projects in the state
Your business owns or rents property in the state.
As online sales increased, states began to realize that they’re missing out on significant tax dollars. Most states have enacted different rules to try and recapture some of these “lost” dollars. For online sellers, nexus can be created even if you’ve never had any of the above actions. Mailing your products into a state at a certain volume or dollar amount total can also create nexus.
Over the past several years, significant changes have occurred – and the Supreme Court has backed some of these changes.
TYPES OF NEXUS
There are at least two types of nexus for businesses. The first is income tax and the second is sales tax. Usually, if you have one type of nexus you need to register for both – but not always! A good tax accountant can help you figure this out.
Sales tax nexus in many states is based on dollars of sales and/or transactions. Many states have a threshold of $100,000 or 200 transactions. If you sell small-dollar products, that 200 transaction threshold can hit quickly.
Here’s a list compiled about 18 months ago; use it as a guideline to begin looking at sales tax nexus by state. Definitely research each state that you sell in to see what their rules are. A few states even require you to register if you come and sell at a convention in their state…and they’re watching to make sure vendors are registered!
One more twist to the story…selling through a marketplace like Amazon normally doesn’t count towards nexus in most states. Amazon is collecting sales tax from many of its sellers, and you don’t have to report that – usually.
Whether or not you have income tax nexus will depend more on the traditional, physical presence to create nexus. But be careful, if you are physically located in another state – even for a few days - you can be considered to have nexus.
No one likes taxes, but you also don’t want to inadvertently build up a large tax liability without knowing it. Some states are more aggressive than others at finding those they think should be collecting and remitting taxes. They’ll find your name when auditing a customer of yours and may reach out to you with questions – be sure to bring in a good tax accountant to advise you before answering.
Taxes…especially sales taxes…are confusing. Knowing whether or not you need to register outside of your home state can be a difficult decision. We can help point you in the right direction and connect you with advisors to help answer further questions. Connect with us for a complimentary consultation.