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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?”
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.
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:
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.
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.
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.