Risky Business – The Tax Liability You Don’t Know You Have
Nexus? Never Heard of It!
Many non-retail companies are under the impression that they don’t owe out-of-state sales tax. However, if you provide products or services to out-of-state customers you may be at risk for nexus. If you have no idea what nexus is or how it can impact your business, you are not alone. Even defining nexus can prove to be challenging.
In its most basic form, nexus is a “sufficient physical presence” in a particular state. In other words, nexus means that a business has established a permanent, temporary direct, or representational presence within that state. There are certain activities and situations that trigger nexus for a variety of 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 their connection with a subsidiary, affiliate, or agent that is out-of-state.
Adding to the complexity of nexus is the fact that each state maintains different provisions and physical presence standards. With the lack of consistency associated with nexus, 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 the varying provisions, statutes and rulings of each state 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 definitely not an acceptable excuse to the government and often steep penalties will be enforced. With proper strategic planning, you can manage these types of tax liabilities. The best strategy is being 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 types of complexities and need for innovative approaches to tax planning are what 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 every day to reduce their risk and improve their bottom line.