Understanding State Tax Nexus

Many business owners ask, if my business has an opportunity to sell to a customer in a new state.  Do I now need to file tax returns in that state?

Exciting new opportunities can also bring about new regulations and requirements for business owners and management.  It is important to understand state and local laws governing businesses to provide a clear view of the administration and cost that may accompany an opportunity in a new state.  Answering questions around tax and other regulatory obligations up front can help prevent missed filings, penalties, tax liens, and potentially other legal actions that interrupt the operation of your business.

In order for a state government to subject an entity to business taxes such as business income and sales tax, the business must have enough connection, or nexus, with the taxing state.  Existence of employees or property in the state is evidence of a physical presence in the state which is typically the deciding factor giving taxing authorities the right to impose tax.  The thought behind the physical presence standard is that when a business has a physical presence in a state the business is receiving the benefit of the infrastructure and services that are funded through tax revenues in the state.  At the point where a business receives the benefit of those services, it is reasonable for the state to ask the business to pay its share.

There are some exceptions where a business may be permitted to have employees only soliciting sales in a state and not be considered to have enough connection with the state to be subject to tax.  Additionally, there are some states that impose more far reaching taxes based on the gross receipts of a business that can be triggered without meeting the typical physical presence requirement.

Ultimately, it is important to be aware that tax laws are not the same from state to state.  While state regulatory and tax requirements are easily managed, it is important to do the research early to ensure that your business is aware of the rules that apply.

If you have questions about tax filings please contact Monika Diehl, CPA at mdiehl@claruspartners.com or call 614.545.9100.

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