Companies & Individuals Beware. Now the States are Coming!

Nexus in general means a connection. The term nexus is used in tax law to describe a situation in which a business has a “nexus” or presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state. Nexus describes the amount of business activity that must be present before a state can tax an individual or business’ income. If a taxpayer has nexus in a particular state, the taxpayer must pay and collect/remit taxes in that state.

Nexus is determined differently for income taxes and for sales tax purposes. Generally, nexus is created for income tax purposes if an individual or business derives income from sources within the state, owns or leases property in the state, employs personnel in the state in activities that exceed “mere solicitation,” or has capital or property in the state. The requirements vary from state to state.

Nexus is determined differently for sales tax purposes. Here are a few examples in which a business may have sales tax nexus in a state:

  • If the business has a physical location in the state
  • If there are resident employees working in the state
  • If the business has property (including intangible property) in the state.
  • If there are employees who regularly solicit business in the state.

The issues relating to whether a business has a nexus in a state and is thus subject to the state’s taxing authority is complex and each state views the concept of nexus differently. Recently, improved techniques for identifying workers from beyond their borders have led states to increase tax enforcement. In fact, in a recent article by Catherine Rampell in the New York Times entitled “States Look Beyond Borders to Collect Income Tax Owed” discussed how states are becoming more aggressive on imposing income tax on nonresidents. An excerpt:

When Josh Beckett pitches for the Red Sox at Yankee Stadium, New York collects income tax on the portion of salary that he earned in New York State.

But what about a Boston Scientific sales representative who comes to New York to pitch medical products to a new client? New York has decided it wants a slice of that paycheck, too.

Anyone who crosses a state border for work – to make a sales call, say, or meet with a client or do a road show on Wall Street – probably owes income taxes in that state.

Do you or your company have any concerns in this area? If so, feel free to contact Anders or your tax advisor.