It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. As a result, many businesses quickly find themselves engaging in interstate commerce.
But therein lies a risk: Operating in another state means possibly being subject to taxation in that state in accordance with that state’s tax laws when nexus is established. As a result, the potential exists for increased complexity in monthly, quarterly, and annual filing requirements and reporting.
Do you have “nexus”?
Essentially, “nexus” means a business presence in a given state is substantial enough to trigger that state’s tax rules and obligations, whether it be Sales and Use Tax, Unemployment Insurance Tax, State Income Tax Withholding on Wages or Back-Up Withholding on Independent Contractors, and/or State and Local Income or Franchise Taxes.
Precisely what activates nexus in a given state depends on each respective state’s laws as well as their chosen criteria for determining nexus. The common criteria include, but are not limited to:
- Employing workers in the state,
- Owning (or, in some cases even leasing) property there,
- Marketing your products or services in the state,
- Maintaining a substantial amount of inventory there, and
- Using a local telephone number.
Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state may not establish nexus there. A detailed analysis of the laws for each state in which the business operates should be reviewed with a professional to determine if nexus has be established in order to determine the appropriate course of action.
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may be subject to.
Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax burden has been reduced due to the fact that other states’ laws may be more beneficial than your resident state’s tax laws, thus providing the opportunity to generate tax savings. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to use any rate or laws differentials to your advantage to lower your overall tax burden.
The complexity of state tax laws offers both risk and opportunity. Contact our seasoned professionals for help ensuring your business is aware of the potential benefits of participating in interstate commerce.
Jordan Raynor began his career with Hancock & Dana in 2010. He provides a broad range of tax, accounting and business consulting services for individuals, closely-held business, pass-through entities, trusts and estates. Additionally, with a desire to leverage his accounting and business knowledge base, Jordan also specializes in SSAE 16 examinations and other attestation engagements.Tags: interstate commerce, nexus