Winning Back-Office Strategies to Boost Your Business Agility
VIEWpoint Issue 1 | 2023
2023 Compliance Trends: Staying Ahead in an Evolving Regulatory E...
Most U.S.-based businesses are familiar with its federal tax return requirements but regularly overlook the tax laws set and enforced by state governments. If you conduct business activities across the United States, you may be unknowingly creating nexus in other states – increasing your tax liabilities and risk.
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.
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:
2. Exceeding activity thresholds (economic presence)
Some states set minimum thresholds to create 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:
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.
No, understanding nexus identifies which taxes you owe. Other factors will contribute to how much tax you owe. These factors may include:
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.
It’s key to know your business’ activities, its volume and where in the United States 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. Contact us today to obtain assistance.
By Elizabeth Potocki, Shareholder, CPA
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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