Risky Business – The Tax Liability You Don’t Know You Have

nexus risky business the tax liability you dont know you have 810x650
August 31, 2016

Nexus? Never Heard of It!

Many non-retail companies are under the impression that they don’t owe out-of-state sales tax. However, providing products or services to out-of-state customers may cause you to be at risk for Nexus. You are not alone if you have no idea what it is or how it can impact your business. Even defining nexus can prove to be challenging.

In its basic form, nexus is a “sufficient physical presence” in a particular state. In other words, it means that a business has established a permanent, temporary direct, or representational presence within that state. Certain activities and situations trigger nexus for various business taxes, including; sales and use tax, income tax, and franchise tax.

Many of these triggers are not obvious and result in the most problematic areas for companies. They include using a third-party vendor to install and/or make repairs to your products, storing inventory, attending a trade show, conducting training or holding a meeting, or employing remote workers. Companies can even meet the nexus standards through a connection with a subsidiary, affiliate, or agent that is out-of-state.

Adding to the complexity is the fact that each state maintains different provisions and physical presence standards. With the lack of consistency, keeping track of everything can quickly turn into a full-time nightmare. It is especially important for businesses entering a new state to consider a nexus study. This proactive study will determine if your future activity will create sales tax responsibility.

In recent years we have seen a steady increase in states aggressively seeking out their share of tax revenue. Nexus is one popular way the states are making money. Understanding each state’s varying provisions, statutes, and rulings is critical.

The Stakes Can Be High

What’s the risk if you are discovered to owe nexus tax? Not knowing that you owe taxes is not an acceptable excuse to the government, and steep penalties will often be enforced. With proper strategic planning, you can manage these types of tax liabilities. The best strategy is to be fully aware of your tax compliance obligations and how they impact your business.

Nexus is a confusing concept with significant consequences for an unprepared company. These complexities and the need for innovative tax planning approaches led to the development of our strategic tax advisory practice. Our team has the required knowledge and resources to help you make informed decisions about compliance. We work with clients daily to reduce risk and improve their bottom line.

Tom Moul, CPA - Stambaugh Ness

Categories: Tax