Each state has its own regime for corporate income tax, sales tax, use tax, and other revenue raisers. Typically, you are subject to a state’s taxes if you have a nexus to the state. Nexus means having a substantial physical presence within a state, such as maintaining offices, warehouses, or a sales force. The presence may be permanent or temporary.
However, as states look to expand their ability to tax, the concept of nexus is growing as well, and may cause you to become subject to a state’s taxes without any conscious decision on your part to transact business there. For example, merely traveling on business by airplane creates nexus in a number of states. And with the advent of online sales, a number of states have created “click-through nexus,” where online (remote) sellers with a certain level of sales are deemed to have sufficient nexus to collect sales tax in the state where the sales occur (the location of the buyer even though the seller is in another state).
The 2016 Bloomberg BNA survey of State Tax Departments found some startling information that you should know about when it comes to nexus. (You can download a complimentary copy of the survey, but you have to provide your email, name, company, and zip code.)
Key findings from the survey:
- Using FedEx or UPS to deliver goods in another state can create sales tax nexus for remote sellers (this is so in 1 out of 4 states).
- Because of the complicated tax rules, some businesses may be subject to double taxation (i.e., tax on the same income, sales, etc. in more than one state). While there may be some deductions or credits for taxes paid in one location against taxes in other, the write-offs may not fully account for the taxes.
- Guidance on how pass-through entities (S corporations, partnerships) should apportion income to the states in which there is nexus is largely unclear; only 6 states have clear guidance rules.
Bottom line
Talk with your tax advisor to determine your business’s exposure to taxes in states that you may not think have a physical presence in. If you learn you will be treated as having a nexus elsewhere, then discuss ways to minimize your tax bill in any of these other states.
