When a business expands into other states it may be required to pay sales, income or franchise taxes, but only if the business has established "nexus" in the new state.
In tax law, "nexus" means a business has a presence in a state that makes it subject to state taxes; a certain level of business activity that must be present before a state imposes taxes on a business.
Determining nexus in a state is complicated. Each state views the concept of nexus differently, and states typically determine nexus in different ways for income, franchise and sales tax.
Requirements differ from state to state, but income-tax nexus usually occurs if a business derives income from sources within the state, owns or leases property in the state, or employs personnel in the state for activities other than selling. Some states will even tax out-of-state companies for income on trademark licenses, credit cards or other intangibles.
The franchise or business privilege tax sometimes requires less of a connection than income taxes. Simply soliciting orders or sales in the state may be enough to create nexus in some states.
The laws for sales tax nexus are not as consistent across the states as those for income tax. Depending on the state, a business could achieve sales tax nexus if it has a physical location in the state, if employees work in the state, if the business has tangible or intangible property in the state, or if employees regularly solicit business in the state.
Having nexus in more than one state complicates tax reporting and payment, because of the need to divvy up income, then file and pay taxes to more than one state. Businesses should consider taxation issues before they implement any plans to expand beyond the boundaries of their home state.
-- Herb Wolfson
Wittlin, Simon & Newman
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