Most U.S.-based businesses are familiar with their federal tax return requirements but regularly overlook the tax laws set and enforced by state governments. If you conduct business activities across the U.S., you may be unknowingly creating nexus in other states – increasing your tax liabilities and risk.
What is nexus?
Nexus is a connection that links two things. When applied to state taxes, nexus represents the activity a taxpayer performs in the state. Once taxpayers meet the threshold to establish nexus, they’re subject to the state’s tax laws.
What business activities create nexus?
Many business activities can create nexus; two of the most common are listed below. In many situations, falling into one of these categories is enough to have nexus.
1. Physical presence in a state
Historically, nexus was established when taxpayers had a physical presence in a state. If they owned or rented a building or had employees working in the state, they had a physical presence.
As business practices evolved, so did the definition of physical presence. Physical presence now includes:
- Employees working from home
- Third parties performing services for your business
- Logistics companies maintaining and shipping inventory on your behalf
- Owning another company
2. Exceeding activity thresholds (economic presence)
Some states set minimum thresholds for creating nexus, such as number of transactions or sales revenue. When you exceed these limits, you establish nexus and are subject to the state’s tax laws. Occasionally, these thresholds may overlap with physical presence.
The following list is an example of economic nexus thresholds:
- $50,000 in property or payroll
- 200 transactions or $100,000 in sales
Is nexus the same for all types of tax? All states?
No. Nexus varies between states and types of tax. A good rule of thumb to remember is this: no state or tax is the same. You should determine your nexus on a case-by-case basis.
If I have nexus, does it mean I always owe tax?
No, understanding nexus identifies which taxes you owe. Other factors will contribute to how much tax you owe.
These factors may include:
- Federal laws that prevent the state from taxing you
- Non-taxable or taxable products in the state
- Business or customer tax exemptions
- Taxes paid to another vendor or state
- Third parties collecting and remitting tax on the sale
Why should I care about nexus?
Nexus tells you when to act. You may need to register for taxes, collect and remit taxes and file returns. When you know your tax obligations before you’re required to meet them, you can make informed decisions and maintain your profit margins.
Plus, if you don’t monitor your nexus, you expose your business to risk and penalties. Remember – it’s your responsibility to follow states’ tax laws. States are responsible for finding taxpayers who aren’t complying and collecting tax revenue.
Tips for success
- Talk to your tax advisor before starting new activities in a state, even if you currently do business in that state.
- Make sure you know when business activities are taxable. Understand your obligations to collect and remit tax.
- If you’re doing business in a state and suspect (or know) you aren’t meeting your tax requirements, don’t wait for the state to find you.
It’s key to know your business activities, their volume and where in the U.S. they’re happening. With more than 50 U.S. states and territories, keeping up with the many tax laws and nexus requirements can be challenging. Rely on our state and local tax experts to help you understand your tax liabilities, reduce risk and grow your business.
Have questions about creating nexus? Let’s talk!