Operating across state lines presents tax risks — or possibly rewards
It’s a smaller business world than it used to be. With the ease and popularity of e-commerce, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.
But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.
The key question in determining most inter-state filing requirement is – do you have “nexus”?
Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax reporting rules.
Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers may vary but common criteria include:
• Employing workers in the state,
• Owning (or, in some cases, even leasing) property there,
• Marketing your products or services in the state,
• Maintaining a substantial amount of inventory there,
• Using a local telephone number,
• Having a booth at an out-of-state sales convention,
• Making over a specified number of sales calls or visits to the state.
Then again, one can’t always say that nexus has a “hair trigger” since the requirements can vary from state to state. A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider having us perform a nexus study on the various states. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you to filing an additional corporate or sales tax return.
The results of a nexus study may not always be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up or renting a mail drop address or phone number there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.
The complexity of state tax laws offers both risks and money-saving opportunities. Clients are welcome to contact us for help.
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