Whenever states experience a dip in their revenue, they often shift into a “generate cash” mode to help them replenish their depleting funds and survive the financial challenge. No state leaders want to face empty coffers, so they have to seek alternative methods for refilling them.
What this means for business owners however is that as the states become more aggressive one tried and true solution has been to seek ways of collecting additional income tax revenue from corporations that are doing business in the state. But under certain circumstances this can search for tax funds can extend to companies that do not even maintain a physical presence there!
This is where the concept of nexus comes in. Nexus means ‘having a connection’ – and in tax law it is a term used to describe a situation in which a business has a “nexus” or “connection” or “presence” in a state and as a result is subject to state income taxes and to sales taxes for sales within that state.
The states pursue this line of taxation because they want to be sure that if a company is making sales (generating income) in their state, or conducting some business in their state, they are at the same time paying their fair share of taxes on that income. They refer to nexus to describe the amount and degree of business activity that must take place in order for a state to actually be able to tax an entity’s income.
This scenario can be complicated as the revenue hungry states extend, and even potentially overreach, their definition of the out-of-state company’s tax responsibilities. Whether the taxpayer needs a physical presence or just an economic presence, this process can create a confrontational atmosphere, leading to confusion or worse. With internet sales growing and companies establishing a regional and even national footprint, this problem is only going to become worse and the waters more muddied over time. To reinforce the challenge, we only need to look at the 2015 statistic for U.S. mobile commerce sales which totaled about $104 billion, up 38.7% from $75.03 billion in 2014. And the interesting fact is that this statistic does not capture all internet sales (those made without a brick or mortar facility in the state!) – but rather it is just a reflection of sales conducted on mobile devices – not through other online services.
The confusion that can result is one of the most challenging concerns facing companies today because decision makers need to be able to anticipate the taxes they will owe and budget appropriately.
If you are conducting business across state lines, talk over your own situation with your tax consultant or call Ken Bagner at 973-994-9494.
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