Understanding State Nexus for Multi-State Businesses

Does your business sell to customers across state lines or employ remote workers in multiple states? You may have more tax exposure than you realize. In this audio blog, Maria Gordon, Tax Manager at CK, breaks down the concept of state Nexus, the legal connection that can trigger sales, income, and payroll tax obligations in states beyond your own. Learn the four key factors that create Nexus, how apportionment determines your tax liability across states, and practical steps you can take to stay ahead of multi-state tax compliance before it becomes a costly surprise.

Transcript:

Hello, my name is Maria Gordon. I am a tax manager at Cray Kaiser and I have been with the firm for nine years. I would like to talk today about state Nexus for multi-state companies. If your business has customers throughout the U.S. or remote employees working in various states, you may have wondered about the implications of multi-state taxation or maybe you’ve even worried that you might owe tax in states and not realize it. With each state having its own guidelines, accurately determining your business’ state exposure is quite a complex undertaking. Businesses need an advisor with an in-depth knowledge of the tax laws of every state and the various complexities in determining Nexus for both sales tax and income tax.

So let’s start on this. To determine whether your business has exposure in a state, we must consider Nexus. Nexus is just a legal level of connection with a state that gives that state the authority to tax your business, whether it be sales tax or income tax. So in determining if Nexus exists, we look to four general areas. The first of these would be the amount of revenues that you have in a state, and once certain thresholds are reached, your business could be liable for sales tax, income tax, or franchise taxes. And the second one being whether your business has property in a state or holds inventory stock within that state. These things automatically give you physical presence in the state and could subject you to taxes. The third of these is whether you have employees, sales reps, or other remote employees working in a state. And finally, the fourth item, for some states, simply being registered to do business in the state will result in Nexus.

Now, with the ever-expanding remote workforce, this impacts many companies. Even a single employee in a state gives your business a tax presence, and you could be subject to sales tax, payroll tax, and income tax. To add more difficulty to this, state taxes can depend on where the employee lives and where the employee works, which are not always the same state. Some states do have agreements with one another to simplify payroll tax reporting of remote workers, but then again many states do not. If you do determine that your business has Nexus in a state, it doesn’t necessarily mean you will pay tax on 100% of your income to that state. Instead of just subjecting all of your income, each state uses apportionment to determine its portion of the pie, as you will. Apportionment is a formula based on the amount of sales, property, and payroll in the state. Of course, each state has their own formula for apportionment with varying weight on each of these three factors, but the sales factor is generally the most important. Speaking of the sales factor, how do I identify where revenues occur? With a business that sells widgets and ships them around the U.S., it’s quite simple. Each sale is attributed to the state that the widget was shipped to. But what if your business provides intangibles such as computer software or if your business provides services? Each state uses either a market-based approach or a cost-of-performance approach. Under market-based sourcing, revenues are sourced to the state where the benefit of the intangible or service is received. And under cost-of-performance, revenues are sourced to the state where the work is performed. So these differences are quite important between the states and a business needs to understand how they’re going to source their revenues.

If all of this feels daunting, don’t worry. It is possible to stay on top of Nexus requirements and protect your business from unexpected tax bills. Some things to consider. If it has been a while since you’ve considered your company’s footprint across the states, Cray Kaiser can help with providing a Nexus study. This will show you where the company has Nexus and open up the discussion on how to move forward. And secondly, be proactive by annually checking levels of revenues and which states those are from. Also, inform your advisor whenever you’ve added an employee in a new state. These simple steps can help to protect your company from surprises. And Cray Kaiser, as always, is here to help you, especially as you wade the deep waters of multi-state taxation. If you’re feeling unsure about your business’s exposure across the states, please feel free to contact us. You can reach us on craykaiser.com. And we look forward to hearing from you.