Do you know how and when your business can be taxed by other states? The key term in navigating multistate taxation is nexus, which is created when you have a specific presence or connection with that state. Once nexus is established, you may become subject to a state’s sales, income or gross receipt taxes. Currently, nexus units of various states are actively seeking out non-filers and Departments of Revenue are wielding a powerful new tool, economic nexus, to broaden their ability to tax and collect money.
For many years, the hallmark of nexus required actual physical presence in a state for it to subject an out-of-state company to its sales or income tax. This meant that the company had to have employees, agents or physical property in the state to have nexus. Nexus without physical presence is referred to as “economic nexus”, which means the existence of significant sales in a state may very well indicate that your company could be subject to income taxes (the economic nexus rules do not apply to sales tax). So, even though you don’t have any employees or property in a state, you still might be subject to its taxes if you have a certain level of sales being sourced in it. All but 6 states have enacted laws adopting economic nexus and some states deem economic nexus to exist if sales, payroll or property exceed a fixed dollar amount regardless of any other connection to the state.
A limited exception to state income taxation applies for companies who only sell goods and whose sole physical presence in the state is limited to the solicitation of orders by employees or agents which must be sent back to the home state office for approval. The exception applies only to a state tax based on net income so it does not apply to a sales tax, gross receipts tax or net worth tax.
Please contact your SVA professional to assist you in navigating your multistate tax obligations and the multitude of special rules, such as sourcing of revenue and the different tax regimes of various states, municipalities and other state governmental units.