Sales Tax: What is Nexus?

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Are
you worried about multi-state tax compliance? Business owners should carefully
consider sales and use tax nexus issues. Nexus rules are expanding and creating
tax liability for businesses in states where they previously did not exist. If
you are not up to speed on all the changing and new state tax laws, it can put
your business at risk for penalties and interest charges on unpaid tax
liabilities – potentially in multiple states.

WHAT IS NEXUS?

Nexus
is known as, “the level of contact that must exist between a taxpayer and a
state before the state has the authority under the U.S. Constitution to assess
a tax.”

Many
states are increasing the number of audits, thereby allowing states to collect
more revenue without enacting new taxes or increasing tax rates. These state
audits are unexpected, and taxpayers are shocked to learn they are not in
compliance and may face substantial tax and penalties as a result.

A
nexus study was done by Sabrix, Inc. and the results showed 95 percent of the
companies surveyed underestimated their nexus issues. The most common items
companies overlooked were:

  • Independent
    contractors – agents acting on behalf of the company may create nexus
  • Services
    – performing services in other states may create nexus
  • Trade
    shows – spending a single day at a trade show in another state may create nexus

STATE INCOME TAX NEXUS MAY BE ATTAINED THROUGH ONE OF THREE PRIMARY ACTIONS:

  1. A physical presence
  2. An economic presence
  3. Through the ownership of a pass-through
    entity satisfying either the physical or economic presence standards

DOES THIS APPLY TO MY BUSINESS?

Generally,
having employees or owning or leasing property in a state creates nexus. Other
activities qualifying you for nexus include:

  • Maintaining
    a local bank account
  • Accepting
    orders for your services
  • Using
    a local phone number 

There
are many complexities with today’s cross-border business climate requiring
careful consideration because of unforeseen nexus issues. Smith Schafer can
help you navigate the laws to ensure your state income tax obligations are
correctly calculated and reported. We work with Minnesota businesses in
multiple industries to identify where such tax liabilities exist through nexus
determination studies.

Smith
Schafer Nexus Case Study Services:

  • Evaluation
    of Multi-State Business Activities
  • Physical
    and Economic Nexus Review
  • Identification
    of Nexus Creating Activities
  • Determination
    of State and Local Connection
  • Voluntary
    Disclosure and Amnesty Program Consultation
  • Multi-State
    Tax Filing and Planning

Contact our state tax planning and compliance experts to schedule a free 30-minute consultation.

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