If you have clients with businesses in multiple states, product or service sales in different states, or employees in other states, they need to know a thing or two about nexus.
Unfortunately, nexus is a confusing topic. In this article, I'll explain some of the nuances of sales tax nexus and income tax nexus to help you prepare your clients for their business registration and tax obligations.
What does having nexus mean?
Nexus implies a connection. When we say a business has nexus in a state, it means it has a connection that warrants registering to collect and pay taxes in the state.
Generally, states consider that a business has nexus if:
- It has a physical presence — such as an office, store or warehouse — in the state.
- It has employees working in a state.
- It has a certain degree of sales activity or income — without a physical presence — in a state.
What constitutes nexus varies from state to state, so it's no wonder many business owners are unaware or unsure of their responsibilities. They might not realize that even if they don't have a physical location in a state, they could still be considered to have nexus. Making matters more confounding, states sometimes change their rules for determining nexus. So it's vital that clients with activity in other states research each state's rules and keep up with any changes to their registration and tax responsibilities.
Physical nexus is pretty straightforward, but things get more complicated with sales tax and income tax nexus.
Sales tax nexus
Sales tax regulations vary by state, with each state setting its own rules, registration process and tax rate for out-of-state retailers that reach economic nexus in their jurisdiction. Many states set their sales tax nexus thresholds at 200 sales transactions in the year or $100,000 in sales revenue annually.
What about clients selling their products through Amazon, Etsy or other online platforms? Many states have specific laws pertaining to marketplace facilitators with an e-commerce infrastructure, customer service center, marketing operations and payment processing services in the state. Typically, marketplace facilitators — not the individual sellers selling their products through those platforms — who meet the state's sales tax nexus criteria must obtain a seller's permit and collect and remit the state's sales tax on taxable purchases.
Income tax nexus
Businesses with a physical presence in a state must pay income tax there. But even a business without a physical location might have to pay income tax (as well as sales tax) in the state if the company reaches a certain amount of sales revenue there. Also, an out-of-state company with employees in a state (even if they don't live there) could have income tax nexus in that state if its payroll reaches a certain threshold. Put simply, if a company's employee conducts work in the state, whether or not the individual resides in that state, the employer may have income tax liability there.
Moreover, an employer must comply with the state's payroll tax rules where an employee performs their work. For example, my company has employees living and working in other states, so we must have tax accounts in all those states and calculate withholdings for out-of-state employees according to their state's tax laws and rates.
This affects the employee, too. An employee who lives in one state and works in another might owe state income tax in both states. Some states have reciprocal agreements with other states whereby the employee will only owe tax in the state where they live.
If no reciprocity agreement exists between the state where the employee works and the state where they live, the employer typically makes payroll withholdings according to the tax laws of the state where business is conducted. The responsibility of reporting and paying income tax in the employee's home state then falls on the employee.
Nexus and foreign qualification
Besides paying sales tax and income tax (if required), business entities like
Resources for determining nexus
You can advise your clients about their nexus-related obligations to the degree your professional credentials, licensing and expertise will allow. If nexus guidance is beyond your authority and scope of expertise, consider referring your clients to knowledgeable, trustworthy tax and legal professionals who can advise them. You and your clients can also learn about states' nexus criteria by contacting the appropriate state agencies for details about their rules and thresholds.
