One of the most basic questions that a businesses has when selling into multiple states is where do we have a responsibility to collect and/or pay tax. This question usually relates to sales and use as well as income and franchise taxes.
The answer to this question is twofold. The answer for sales and use tax is: wherever you have nexus and wherever what you sell is taxable. For income tax, the answer is a little more complex, but to start, it is wherever you have nexus and whether your income can be sourced to the state. OK - but what exactly is nexus?
If you look in any dictionary you will see that nexus is generally defined as a connection or link. When used in a tax context, nexus is the term we use when a company has a strong enough link or connection with a state, such that the state has the legal authority to require the company either to pay its income/franchise taxes or collect sales/use taxes on its behalf.
On the surface this sounds like it should be a simple concept. If the business is connected to the state we have to pay and collect taxes and if we don’t have that connection, we don’t. While this is true, nexus is much more complicated and once we look at what actually may or may not create this link or connection you will probably agree.
It All Starts with Nexus
If you have nexus with a state there are certain actions that state will require of the business. These include registering with the state and then collecting and/or paying its taxes. If you do not have nexus with a state then you have no worries as the state does not have jurisdiction over you for tax purposes.
However, nexus is one of the most underestimated and misunderstood state tax concepts, which makes this the number One Hotspot. Many companies and their advisors do not get this right, which can lead to costly and sometimes devastating results.
We intend this blog to be a tool that will help you better understand nexus and successfully navigate yourself into compliance. Over the coming weeks and months we will be looking at the different types of activities that may or may not create nexus. Since nexus for sales tax can be greatly different from nexus for income tax, we will concentrate primarily on sales tax.
We want this tool to be interactive so what are some of your questions as they relate to nexus? Please submit to us using the "comment" box below.
Other recent “Sales Tax Basics” posts by Michael J. Fleming:
- Sales Tax Filing Basics
- Taxability: Sales Tax HotSpot #2
- States with No Sales Tax
- Nexus: Sales Tax HotSpot #1 and Key Sales Tax Consideration
- New Sales Tax “Basics” Blog: 5 Hotspots You Need to Understand