State taxes used to be simple. You have a store in Chicago; you pay Illinois tax. You have a warehouse in Indianapolis; you pay Indiana tax. But what if you have sales people visiting Denver? Or you work with an online reseller with a location in Denver? Do you need to pay Colorado tax? The tax term used when determining in which localities a business must pay tax is called nexus. How nexus works often stumps even the most tax-savvy business owners, especially with the impact of online sales and constantly changing rules. By understanding and correctly determining nexus, you can avoid unnecessary penalties and stop asking yourself, “do I have nexus?”

What is Nexus?

Simply put, nexus is the factor that dictates a states’ ability to assess tax. Nexus, or sufficient presence, is determined by a number of factors, including a business’ temporary or permanent presence of people or property in a state.

• People can include employees, service people, independent sales agents and independent service agents.
• Property can include inventory, offices, warehouses and temporarily consigned physical space.
• Temporary presence can include making sales calls, visiting customers or attending trade shows.

Do I Have Nexus? How is it Determined?

Some aspects of nexus are clear. For example, if a business has a permanent location in a particular state, there is no federal limitation on a states’ ability to subject the business to income tax. Beyond the obvious, however, each state defines nexus in its own way, and differently for different tax types.

For example, states may consider the following when determining nexus:

• If products are sold in a particular state but there is no physical presence or employees in that state, the business is exempt from that state’s income tax, but may owe sales tax.
• If a business physically sends salespeople to a different state, they would generally owe sales tax in that state. However, if the salesperson conducts the entire sale from one state, and there is no other connection to the other state, the business would only owe sales tax in the state in which they conducted the sale.
• Some states may charge sales tax to online resellers. Because online sales are still relatively new to the business world, click-through nexus rules are one of the most complicated and debated areas of state tax.
• Most states consider nexus present if delivery is made in a state using the business’ own vehicles. Using a common carrier can help to limit nexus.

Why are Definitions Changing?

States’ definitions of nexus are adapting to evolution in technology. Constantly changing technology changes the way we do business. As online sales grow, businesses conduct more and more business out of state. In addition, advances in technology make it easier for states to collect information about sales occurring within their state.

Additionally, given budget constraints, states are becoming more aggressive in seeking out additional tax revenue.

How Do Changes in Nexus Impact the Small Business Owner? 

The lack of a consistent definition of nexus state-to-state creates confusion and exposure to tax liability. Small businesses with little to no internal accounting departments may not have the time or the expertise to properly assess nexus. For businesses with interstate activity that only file a home state tax return, the potential tax exposure and tax complexity can be a significant cause for concern.

How Does What’s Next Impact You?

A federal nexus definition has been spoken of for years, but thus far has not become a reality. In the meantime, it’s important for business owners to understand their risk. Consult with an accountant to determine how nexus is defined in the states in which you do business. Find out if you need to register to do business in other states or file additional state tax forms. Explore voluntary disclosure programs and statutes of limitations. Most importantly, any time you have a question about whether or not you have nexus in a particular state, check in with your accountant.

Don’t be stumped by your nexus questions. Contact Cray Kaiser today.

One of the greatest perks of owning a small business is flexibility. You can set your own hours and salary. You can plot the firm’s trajectory without consulting your boss, upper management, or even corporate policy. But that same flexibility may become a curse if handled unwisely. A small business owner without discipline and a well-thought-out strategy may fall into serious financial trouble. Employees in larger firms often rely on the human resources department to establish pay scales, retirement plans, and health insurance policies. In a small company, all those choices – and many more – fall to the owner, including decisions about personal compensation.

How to Set Your Salary

While there’s not a one-size-fits-all formula for determining how much to pay yourself as a business owner, here are three factors to consider:

Personal expenses. Tracking your business and personal expenses separately makes it easier to track the firm’s cash flow, and lets you know how much salary you can realistically draw without hurting profitability.

Start with your household budget, then determine how much you’re willing to draw from personal savings to keep your household afloat as the company grows. For a start-up company, owner compensation may be minimal. Beware, however, of going too long without paying yourself a reasonable salary. Be sure to document that you’re in business to make a profit; otherwise the IRS may view your perpetually unprofitable business as a hobby – a sham enterprise aimed at avoiding taxes.

The market. If you were working for someone else, what would they pay for your skills and knowledge? Start by answering that question; then discuss salary levels with small business groups and colleagues in your geographic area and industry. Check out the Department of Labor and Small Business Administration websites. In the early stages of your business, you probably won’t draw a salary that’s commensurate with the higher range of salaries, but at least you’ll learn what’s reasonable.

Affordability. Review and continually update your firm’s cash flow projections to determine the salary level you can reasonably sustain while keeping the business profitable. As the company grows, that level can be adjusted upward.

If you’re not sure how to set your salary, please contact Cray Kaiser today. We’re here to help!