Sales Tax: What is Nexus?

Mar 18, 2020Business, Business Tax

Are you worried about multi-state tax compliance? Business owners should carefully consider sales and use tax nexus issues. Nexus rules are expanding and creating tax liability for businesses in states where they previously did not exist. If you are not up to speed on all the changing and new state tax laws, it can put your business at risk for penalties and interest charges on unpaid tax liabilities – potentially in multiple states.

WHAT IS NEXUS?

Nexus is known as, “the level of contact that must exist between a taxpayer and a state before the state has the authority under the U.S. Constitution to assess a tax.”

Many states are increasing the number of audits, thereby allowing states to collect more revenue without enacting new taxes or increasing tax rates. These state audits are unexpected, and taxpayers are shocked to learn they are not in compliance and may face substantial tax and penalties as a result.

A nexus study was done by Sabrix, Inc. and the results showed 95 percent of the companies surveyed underestimated their nexus issues. The most common items companies overlooked were:

  • Independent contractors – agents acting on behalf of the company may create nexus
  • Services – performing services in other states may create nexus
  • Trade shows – spending a single day at a trade show in another state may create nexus

STATE INCOME TAX NEXUS MAY BE ATTAINED THROUGH ONE OF THREE PRIMARY ACTIONS:

  1. A physical presence
  2. An economic presence
  3. Through the ownership of a pass-through entity satisfying either the physical or economic presence standards

DOES THIS APPLY TO MY BUSINESS?

Generally, having employees or owning or leasing property in a state creates nexus. Other activities qualifying you for nexus include:

  • Maintaining a local bank account
  • Accepting orders for your services
  • Using a local phone number 

There are many complexities with today’s cross-border business climate requiring careful consideration because of unforeseen nexus issues. Smith Schafer can help you navigate the laws to ensure your state income tax obligations are correctly calculated and reported. We work with Minnesota businesses in multiple industries to identify where such tax liabilities exist through nexus determination studies.

Smith Schafer Nexus Case Study Services:

  • Evaluation of Multi-State Business Activities
  • Physical and Economic Nexus Review
  • Identification of Nexus Creating Activities
  • Determination of State and Local Connection
  • Voluntary Disclosure and Amnesty Program Consultation
  • Multi-State Tax Filing and Planning

Contact our state tax planning and compliance experts to schedule a free 30-minute consultation.

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