What is Nexus and How Does it Affect Your Business?
We all want our small businesses to grow. Expanding outside of your home state can potentially attract new customers. However, a word of caution; nexus may increase both your taxes and expenses. Nexus is simply a connection or relationship, in a tax context. Nexus can be as transient as a salesperson attending a tradeshow or as obscure as where your company’s data and applications float in the cloud.
This connection varies from state to state. As states search for new sources of revenue, your trip to their state soliciting new business, even for a day, may establish nexus. Can you attend a tradeshow and not get caught in a state’s nexus web? Maybe. Consider this. Your name and contact information is available to the tradeshow attendees. The same information is available to the taxing authorities who want to find you.
Changes in technology services have ensnared many small businesses in the nexus net. Do you have your company’s data and applications in the cloud? Depending on what state the server storing your data and running your applications is located, a tax liability may be created. The concept of being taxed by a state where you do not have an office or personnel is a difficult one to comprehend. Yet, states have found ways to collect taxes in new and inventive ways.
Most business owners think of nexus as a physical presence, a store or warehouse. While this may have been true in days past, today a physical presence includes an out-of-state salesperson and running applications on a third party hosted server. Sales and use tax requires the lowest nexus threshold. To make matters more complicated, having nexus for sales and use tax may not establish nexus for income, business or franchise tax. Economic and affiliate nexus adds another layer of complexity.
Applicable to the sale of tangible personal property, federal interstate commerce law PL 86-272, or 15 USC § 381, places limits on what income taxes a state may impose on out-of-state businesses. The protection does not apply to the sale of services, intangible property, and real estate or for the privilege of conducting business in their state.
Evading the federal law and income tax stigma, states have enacted taxes by another name not measured by income; franchise, margin, business and occupation, and commercial activities taxes. Even the historical apportionment method of proportionally weighting sales, property, and payroll is being challenged by new formulas giving sales within a state greater significance.
Acknowledging the complexity of states’ sales tax systems as exemplified by the U.S. Supreme Court decisions in Bellas Hass v. Illinois and Quill Corp. v. North Dakota a national effort by state and local jurisdictions and businesses called the Streamlined Sales Tax Project (SSTP) to simplify the sales and use tax process and reduce the tax compliance burden was started in 2000.
Determining nexus is not always easy. States want to make paying taxes simple and straightforward to encourage taxpayer compliance. Should you suspect that a proposed sale or business activity may create nexus, visit the state or local jurisdiction taxing authorities’ website. Search “nexus” and review the criteria for establishing nexus within the jurisdiction. Most FAQs will address general questions.
Business expansion requires the consideration of nexus, the implications of increased taxes, and the expense to track, report, and pay your business’ state taxes. Should you find yourself already doing business in a state and you are unsure if nexus has been established, it’s imperative that you seek help from a tax professional. CPAs and tax accountants can validate nexus and determine whether the business is eligible for a voluntary disclosure process and amnesty program.
The prospect of state taxes should never keep us from seeking new ways to grow our businesses. Yet, consideration of a state’s taxing methodology is prudent and may influence decisions affecting where we look for our next new customer or locate our cloud-based operations.
Frank Mullens is the CFO COO at Marketing Innovations International, Inc. where he encourages the persistent evolution of corporate strategy to seize market opportunities and grow profits. Combining experience as a CPA (inactive), education of an MBA and a variety of accounting and finance roles with a keen understanding of technology, Frank brings a pragmatic view of business to bear on the challenges facing growing businesses.