Where does your business have income tax nexus?

The onslaught of modern-day technology has made the world as we know it a much smaller place.  As a result, even small businesses routinely conduct business activities across state and even international borders.  Other small companies are planning to expand their product and service offerings into new state jurisdictions as a way to grow their businesses.

The word nexus is defined as a connection or series of connections linking two or more things.  In the context of multistate taxation, nexus is some definite link or minimum connection between a state and the out-of-state business that the state seeks to tax.

State and other foreign jurisdictions are politically motivated to export their tax burden to foreign businesses by asserting that virtually any type of in-state business activity creates nexus for an out-of-state business.  This desire is counterbalanced by federal law and the U.S. Constitution, limiting a state’s ability to impose tax on an out-of-state company.

A business clearly has income tax nexus in their home state of organization and in each state where they have brick-and-mortar offices or other facilities.  Income tax nexus may also be established by conducting any of the following activities within a state’s borders (not an all-inclusive list):

  • Making repairs or providing maintenance or service to the property sold
  • Collecting current or delinquent accounts
  • Installation or supervision of installation of the product
  • Providing technical assistance or service, including engineering or design services
  • Hiring, training, or supervising personnel
  • Ownership interest in a partnership doing business in a state
  • Deliveries in company-owned trucks

It can be complicated to determine if a company has income tax nexus in a state where the company sells to its customers from a remote out-of-state location and otherwise has only indirect or incidental contacts with that state.

Taxpayers need to be highly cautious when dealing with nexus issues.  If nexus has unknowingly been established in a state, the statute of limitations for assessment is unlimited for non-filer taxpayers.  Management will often make changes to business operations without considering tax consequences or consulting with a tax advisor about the impact of the change.  This may leave the business completely unaware of its nexus problems.

Businesses generally want to minimize the number of states in which they are required to file returns and pay tax.  Nexus planning is a tool that looks to accomplish this and should generally be considered periodically or when looking at expansion plans or business practice changes.  A qualified tax advisor may be able to identify acceptable alternatives and minor modifications to the business approach that can avoid additional compliance burdens and tax expenses.

If your business is struggling with nexus or other multistate tax concerns, please complete the form below to speak with one of our SALT professionals. 


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