If you’ve been a business owner for any length of time, you’ve probably heard the word nexus tossed around; usually right before a complicated topic! While it may sound a little technical, it is really a simple concept, and in today’s blog post I want to break down what nexus is and why it matters to business owners.
A Fancy Word For “Connection”
The word Nexus means: to connect or link. In the tax world it describes the connection between your business and a particular state(s). And that is important because once that connection becomes strong enough, a state can require you to register, file returns, and pay taxes there. No connection, no obligation. Enough of a connection, you have nexus & you’re on the hook.
That naturally leads to the question, so what creates that connection? Generally, it comes down to two things.
1. Physical Presence
This is the old-fashioned, common-sense kind. If your business has a physical location in a state, you’ve likely got nexus there. That includes things like:
- An office, shop, or warehouse in the state
- Employees who live or work in that state
- Equipment, inventory, or materials stored or used there
- Performing work in the state (e.g. crews on a job site)
If you can point to a physical location or a person present in a state, that’s usually enough.
2. Economic Presence
This is the newer, sneakier kind, and the one that surprises most people. Back in 2018, the Supreme Court case South Dakota v. Wayfair ruled that states could require companies to collect and remit sales tax based purely on how much business they did in that state, even if they never set foot in it. Following that ruling, states have aggressively expanded other economic and factor-based tests to levy income tax and other taxes on out-of-state companies. Examples of activities that trigger economic nexus include:
- Selling & shipping products online
- Providing services online
Why Does This Matter?
The reason this matters is simple: nexus is a trigger that often results in additional filings & additional taxes. The moment you cross that line in a new state, that state will likely expect you to play by its rules: registering, filing, and paying; regardless of whether you realized you triggered nexus or not. The tricky part is that these connections form quietly. A remote hire, a job a few states over, or a good sales year online can all create nexus before anyone notices.
If you’re not sure where your business has crossed that line, that’s exactly what I’m here for. Reach out and I can help figure out where you stand and create a plan to keep you safe!
