by Kendra Schlautman
When your business operates in several states, collecting and paying payroll, sales, and income taxes in those other states can become very complex. Depending on a state’s nexus laws, your business may need to collect and pay applicable taxes to that state. Business owners who are not aware of state-specific laws and regulations can incur large tax liabilities in other states that can place the business at risk.
Nexus, also known as “sufficient physical presence”, means that a business entity has established a direct or representational presence within a state or jurisdiction and by doing so is required to pay all applicable sales, payroll, and income taxes in that state or jurisdiction. Generally, nexus is created if your company has people or property in another state for a temporary or permanent amount of time, establishing a sufficient physical presence in that state.
The problem with establishing nexus is that it varies from state to state. In some states, nexus is based on the number of days your business operates or the amount of activity your business performs in that state. Nexus determination and filing requirements can also be different for income tax vs. sales tax. For example, some states are moving away from an income tax nexus based on a physical presence standard and are moving toward an “economic” presence standard. Under this standard, nexus can be based on the amount of revenue generated from a state.
Nexus laws are also constantly changing in local and state governments and by court rulings. One problem that many businesses run into is that laws change over time and the business is unaware of the changes as they happen. This can lead to tax liabilities owed to the state that the business is not aware that they owe.
Examples of tax liabilities that can be incurred include:
- Being liable to pay sales tax when it was not and can no longer be collected from a customer.
- Being liable to pay sales tax when a sales tax exemption certificate was not obtained from customers.
- Experiencing double taxation because a state determines the business owes income tax and needs to file a return, but the business is unable to amend returns in other states to claim a credit for taxes paid.
Because of the complex and continually changing nexus issues, it is highly recommended that business owners consult qualified professional advisors on their out of state business activities. It is important that your business knows where it has established nexus and what additional taxes should be collected and paid. In addition, you and your accountant should regularly review any multi-state activity to keep up with any changes that could affect your business.
HBE Becker Meyer Love LLP has extensive expertise and experience in nexus issues and multi-state tax filings. If you have any questions about nexus and paying taxes in other states, please do not hesitate to contact our office.