Nexus! It’s not medical condition, or something to be feared! Unless, that is, you’re a company that has decided to “do business” in a state other than the state in which your business is currently located.
Whether you’re a small, medium, or large business, you’ve likely realized that in order to remain competitive in today’s economy, you may need to expand outside of your home state. Perhaps you’re considering opening a sales office, branch or retail location in another state; perhaps you’re considering hiring employees who are residents of other states; or, perhaps you’re considering pursuing new accounts or customers in other states. Unless your company confines all of its business activity to the state in which your business is located, you may be a subject to “nexus.”
The area of state nexus, as it relates to income, sales & use, or other business taxes, is highly complex, has been the subject of much judicial debate over the years, and is continually evolving. But whether you’re the owner of the company, the CFO, the controller, the bookkeeper, the tax accountant, or someone else charged with the responsibility of understanding the state tax implications of expanding outside your state, you really just need to know what could cause your company to have state nexus and what the implications are if you find you do have nexus.
Part 2 of 2: Nexus for State Corporate Income, Franchise and Other Business Taxes
Once a business has expanded into a state other than the state in which it is based, a business may become subject to a variety state taxes. In part 1 of this series, I discussed what it means to have sales tax nexus; specifically how certain activities in a state can create a sufficient “connection”, or “nexus” to a state to require an out-of-state business to register as a sales tax vendor and be subject to the sales tax laws of a state. Although a business may find that their activities create nexus for sales tax purposes, these activities do not necessarily create nexus for other state business taxes.
State Corporate Income Tax Nexus
Historically, state income tax nexus has been created when an out-of-state taxpayer derived income from sources within the state, owned or leased property in the state, or employed personnel in the state that engaged in activities that went beyond certain “protected activities”. While many of the same activities that create sales tax nexus might also create corporate income tax nexus, a higher threshold of activity may be required for a state to impose its corporate income tax on an out-of-state business.