As businsses grow and mature, they start to acquire customers that are located in various states. In this internet age, this can happen much easier than a generation ago. Combined with the fact that states are hungry for tax revenue and are becoming more sophisticated in tracking down companies doing business in their state, this may result in businesses receiving “nexus” (taxable connection) questionnaires from other states.
Historically, a company did not have nexus in a state, unless they had some physical presence in that state. Physical presence includes any inventory or office space (rented or owned), or any employee or independent contractor working in that state on behalf of the taxpayer. In the last few years, especially in the sales tax area, states are now saying that if your sales from customers in the state exceed a certain threshold, you have nexus in that state, even with no physical presence in that state. However, not every state has these thresholds, and for the states that do have these thresholds, the minimum amounts often vary from state to state.
State tax nexus is a complex issue. There are different rules for sales tax nexus versus corporate income tax nexus, so a business may have to register for out-of-state sales tax, but may not have to file a corporate income tax return in that state. In addition, nexus rules for corporate income tax are different for businesses selling tangible goods, as opposed to businesses selling services. Finally, the five boroughs of New York City and the City of Philadelphia (along with other big cities) have their own nexus rules and their own business tax returns that must be complied with.
If you receive a tax nexus questionnaire from another state or a city, you should consult with an experienced tax professional as to how to respond to the questionnaire before filling it out and mailing the questionnaire to the state tax authorities. Our firm is well positioned to help you deal with the complicated issues regarding state tax nexus. If you have any questions about state tax nexus, please contact us.
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