While reaching across state lines may be great for business, it could lead to nexus—and the potential for tax ramifications. Here’s what business owners should know.
In this age of e-commerce, companies that do business solely within their home states’ borders are somewhat of a rarity. Even those that aren’t “doing business” in multiple states are likely to count out-of-state employees, facilities, and/or customers as part of their operations. While reaching across state lines may be great for business, it could lead to significant tax ramifications.
That’s because of something called nexus, or “significant physical presence.” Nexus is legalese for the requirement that companies must pay tax on sales within a state’s borders. In other words, if your Minnesota business has a physical presence in, say, Wisconsin, you must file a Wisconsin tax return.
What triggers nexus?
Determining whether or not your business has nexus in a particular state isn’t always easy. Opening an office or establishing a sales force are two obvious triggers, but others aren’t so straightforward. Here are a few of the lesser-known activities that could cause nexus:
- Providing out-of-state warranty work, even if you hire subcontractors to do it.
- Hiring, for instance, a Colorado-based salesperson to work in your Arizona office. If this person does any work in Colorado, you could end up with nexus there.
- Consigning equipment in a neighboring state. Because you technically own the equipment until it sells, this could trigger nexus.
- Using a company vehicle to make an out-of-state delivery.
These are just a few of the ways your business could end up with nexus. But when you’re in the throes of running a business, whether or not you have it may be the last thing on your mind. To avoid surprises, consider sitting down each year to think about what’s changed in your business. Here are a few of the questions you should ask:
- Where are we renting space?
- Where are we soliciting?
- Where have we registered?
- Where are we hiring?
Get answers: DS+B offers a free nexus risk review
When your business transactions or economic activity cross state lines, you need to understand the various rules and regulations of each taxing jurisdiction. A Nexus Study can identify areas of exposure and help you develop strategies on how to deal with them. Click the button below – then on the next page, send us your situation/questions and our tax professionals will review your business situation.
Understand your business and its operations.
More and more states are cracking down on nexus—it’s important to understand your business and the nuances of its operations to ensure you aren’t inadvertently creating it. If a state thinks you have nexus, it will send you a nexus questionnaire. Make sure the same experienced person responds to these, as changes in wording can make a big difference.
Your tax advisor should review your responses, too, and can also help you evaluate changes in your business that could trigger nexus. As with any tax-related requirement, the more you know and understand about nexus, the better. For more information, contact me.