Many states are looking for new revenue sources to supplement their deficits and balance their budgets. States are now starting to look at out-of-state businesses that may unknowingly have a business presence in their state. As states begin to adopt the use of this “Economic Nexus”, it is important for companies, especially those which are service based, to understand where they may have tax liabilities.
Nexus and Physical Presence
Historically, states looked to physical presence to determine if there was nexus. This physical presence standard gave companies protection against taxes imposed if the company was simply soliciting sales for tangible personal property or only provided services for customers in another state, but had no physical presence there. This presence test is no longer applicable to sales of tangible personal property for sales tax since the South Dakota V Wayfair U.S. Supreme Court case ruling.
Economic Nexus
The below information may be impacted by the Supreme Court ruling of South Dakota V Wayfair case, read more here.
Many states adopted the concept of Economic Nexus to determine if an entity has income tax or franchise tax liability to multiple states. The main thing to keep in mind is that businesses do not need to be physically present in order to have nexus for income or franchise tax. Rather, they merely need to benefit from the commerce of a state. There are minimum thresholds to prove economic presence and each state has their own thresholds. For instance, in Washington State, if more than $250,000 of your receipts are from that state you could become subject to the Business and Occupation tax.
State tax nexus can be triggered by service activities that do not involve sales of tangible property. The most common is hiring outside contractors to perform services or sending an employee repair person into another state to perform maintenance or repair services. Advertising in local media, or even using a telemarketing firm in another state may create nexus in that state. Owning or leasing property within a state often creates nexus in certain states, and therefore a potential tax exposure. These are just a few examples of activities many entities perform every day without being aware they are creating a taxable situation in another state.
If a state has reason to question a company’s nexus within the state, they will send out nexus questionnaires. The results of having nexus but not filing can be catastrophic to a business. If the company has never filed returns the statute of limitations will not run, which means that the state will have the right to go back and assess tax for every year the entity may have had a liability. This can add up quickly. There are voluntary disclosure programs in some states which may limit the exposure.
How DHJJ Can Help
Every business that has any customers in another state should review the rules for those states. DHJJ’s State and Local Tax group performs nexus studies to determine if a situation exists. Please contact DHJJ below or call 630-420-1360 if you would like to discuss having a nexus review.
