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October 11, 2016

Determining if Your Business is Subject to Nexus

The term “nexus” has become a hot topic in the business world. Nexus, also known as sufficient physical presence, is a legal term that refers to the requirement for companies doing business in a state to pay tax in that state.

Types of Nexus

Two different types of nexus exist: sales tax nexus and income tax nexus. A company might meet the requirements in a state for one, both, or neither. With sales tax nexus, a business must collect and remit sales tax on sales subject to tax in that state. With income tax nexus, a business must file income tax returns for that state.

Creating Nexus

Paying tax to the state you are physically located in is the easiest trigger for nexus. There are other situations creating nexus that make it more complicated to determine if a business is liable for collecting sales tax or paying income tax such as:

  • Having inventory, leased property, or employees in a state
  • Accepting or soliciting orders within a state
  • Delivery of product by company vehicles within a state
  • Related companies doing business within a state
  • Conducting seminars or classes in a state

Nexus is subject to each state’s particular taxing authority, making it a layered issue – varying from state to state. Along with different triggers that can create nexus, there are different types of nexus that states are looking at, outlined below.

Physical Nexus—if a company has employees, inventory, buildings, or equipment located in a state

Click Through Nexus—a remote seller (i.e. Amazon) meeting a minimum sales threshold in a state resulting from an in-state referral agent (i.e. online ads)

Economic Nexus—a factor presence test such as property, payroll, or sales in a state or a combination of the three

Substantial Nexus—if a business has a significant connection to a given state, the state may impose its taxes on the business

Ground Hog Nexus—if a state can see a company conducting business in its state, the state may inquire the company about nexus creation

Making Sense of Nexus

There are many different types of nexus and related triggers (even more than the above lists) making it difficult to have a handle on the vast number of rules. Legislation is going on federally and in various states to try and make it easier for companies to understand. For example, a federal bill was introduced in the House of Representatives titled the “Business Activity Tax Simplification Act of 2015.” The bill proposes to move the nexus issue from the state level to the federal level and make it uniform throughout the United States.

Upcoming legislation should help simplify the nexus headache, but if you have questions in the meantime or would like us to perform a nexus study for your company, contact an Anders advisor today.

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