Nexus Studies
Doing business outside of your home state and/or locality may create nexus, which can give rise to a liability to pay taxes in other states or localities.
Nexus refers to the connections your business has with a particular jurisdiction. This connection allows a jurisdiction to subject your business to its tax laws.
Establishing nexus with another state or locality could result in obligations to:
- Collect taxes on sales transactions
- Pay withholding on wages of employees assigned in the state
- Handle income and franchise taxes, licenses, and other requirements
The following are ways to establish tax nexus with a state or locality:
Physical Presence: Physical presence is established through tangible connections, such as
- Having employees, agents, or other representatives working in the jurisdiction.
- Maintaining an office, warehouse, or any other place of business in the jurisdiction.
- Making deliveries to a location in the jurisdiction using the seller's vehicle.
- Storing inventory at a location in the jurisdiction, regardless of facility ownership.
Economic Nexus: There are varying thresholds in determining economic nexus. Some jurisdictions set thresholds based on a seller’s economic activity, while others consider sales revenue or the number of transactions. For instance, in New Jersey, a corporation that derives receipts exceeding $100,000 from in-state sources or that has 200 or more separate transactions delivered to customers in the state during the taxable year will be deemed to have substantial nexus with New Jersey.
Affiliate Nexus: An affiliate nexus arises when an out-of-state business is deemed to have a sufficient presence within another state and is compelled to collect and remit sales taxes due to this in-state affiliate relationship.
The relationship between the in-state and out-of-state businesses must be significant enough to require the out-of-state business to collect and remit sales tax. Below are some of the challenges in determining the factors for what constitutes an affiliate relationship-creating nexus:
- Lack of standard definition of elements of what constitutes affiliate nexus may lead to non-compliance
- Tax laws and regulations are often subject to frequent changes, which makes it challenging for businesses to stay compliant
- Inadequate guidelines make it difficult to determine the depth and significance of in-state and out-of-state business connections
Why are Nexus Studies Important? Nexus studies play a pivotal role in helping businesses understand their tax obligations in various jurisdictions. Many states make changes to their nexus definitions on an ongoing basis. In recent years, different types of nexus were created, going beyond the brick-and-mortar businesses and affecting distance selling. Herbein’s SALT specialists are highly skilled and experienced in performing nexus studies to help taxpayers determine whether and where they have nexus. We analyze a business’s activities across multiple states and localities to determine where a company may have filing requirements and potential tax obligations.