FALL/WINTER 2017-2018 | BWD 13
This story illustrates that through seemingly harmless activities,
your business can easily create connections with states beyond
the business’ physical location. When these connections with
a state become sufficient, that state has the right to impose its
taxes on your business. This is known as “nexus.”
Falling behind on state and local taxes can be financially
devastating to a business and its owners. Statutes of limitations
do not begin to run until tax returns are filed, resulting in ever-
growing tax liabilities (plus penalties and interest). Generally,
once a state contacts your business concerning nexus, remedies
to limit liabilities are no longer available.
Because of this, it is essential to know where your business is
located. How can you accurately make this determination?
Here are four steps to help you begin.
1
Know which tax type you are considering — Income/
franchise taxes generally have different nexus concepts and
rules than sales/use taxes. Applying the wrong set of laws
can lead you to believe you are protected from tax when, in
fact, you face significant exposure.
your business model and revenue
2 Understand
streams — A service-based business is more likely than
a business that just sells tangible personal property to
fall prey to states’ increasing use of economic nexus rules
in their attempt to tax out-of-state businesses. But even
the businesses that traditionally sell tangible personal
property need to rethink their nexus determinations
periodically, as their business model might have changed to
include revenue streams from services such as consulting,
engineering, installation or repairs.
your physical footprint — It is easy to know
3 Consider
where you have “permanent” presence – in the form of
a plant, office or warehouse – and in which states your
employees reside. But you also need to keep track of where
your employees and independent contractors travel. Knowing
where they are and what they do at the locations they travel
to can make the difference between having nexus and a large
tax bill versus intelligently planning their activities in order
to save thousands of dollars of tax. Beyond your employees
and contractors, you may also need to consider the location
of assets such as inventory, tooling, internet servers and
investments in other entities.
your economic footprint — As states expand
4 Consider
the concepts of economic and factor presence nexus, you
will need to know where your customers are located, as the
simple matter of having a customer in a state can create nexus
for a service-based business.
After reading through this list, you’ve probably realized that
being proactive is the best approach to addressing your nexus
determinations. Doing so not only protects your business, but
provides a clearer understanding of your business functions.
Beyond tax savings, this can spur innovative operational ideas
for the future.
So again, where is your business located? As we’ve learned,
the answer to this question is not always clear-cut. By taking
the time to really know your business — from the outskirts of
operations to the core of the services and products you provide
— you can be the North Star that guides your business to success
everywhere on the map.