Nexus: The challenge of determining where you owe state tax
As states push nexus concepts, businesses must keep up
Before a state can impose a tax liability and filing responsibility on an out-of-state entity, it must show that the entity’s activities within the state are sufficient to support an assertion of jurisdiction over the entity’s person or property. This jurisdictional concept, which is commonly referred to as nexus, is one of the core issues of multistate taxation, and is the subject of substantial amounts of legislation, regulatory action, and litigation at both the state and federal level. At its heart, nexus is about each state’s sovereign power to tax, and is best understood by examining the implications of the limitations placed thereon by the U. S. Constitution, federal law, and state law.
Nexus applies to all taxes, including sales and use tax and income and franchise taxes. An analysis of whether an entity is subject to tax in a particular state or locality must begin with one question: Does the state have jurisdiction to tax my business activity? The answer, of course, is not always so simple. Entities currently doing business in more than one jurisdiction must be certain that their activities are appropriately accounted for and any necessary compliance obligations fulfilled. Here are a few of the many questions that must be asked when determining whether nexus for your entity exists in states where your business does not currently file:
- Does your business maintain real or personal property in the state?
- Does your business have employees or independent contractors that travel into non-filing states?
- Do you have significant sales in a state?
- Do you sell cloud-based services to customers in other states?
In addition to the well-established nexus concepts, businesses must be aware that, in recent years, states have taken an aggressive approach to expanding traditional notions of nexus and are continually pushing the legislative and regulatory boundaries of which activities create nexus within their borders. Those expansions are often under fire by opponents and often in litigation; nevertheless a diligent review of expansion to determine a potential impact on your business is necessary.