“Nexus” is a connection between a state and a taxpayer, sufficient enough to allow the state to subject the taxpayer to its taxing jurisdiction and require the taxpayer to file tax returns and pay taxes.
The concept is fairly straight forward, and easily understood, by companies doing business solely within the boundaries of their home state. But for companies engaged in interstate commerce, the determination of nexus becomes a more critical component in taxation matters. Certain activities can trigger nexus for both sales/use tax and income tax compliance, thus requiring an out-of-state vendor to register, report, and remit the appropriate tax to a state where nexus has been determined to exist.
Sellers often fail to register and comply with a state’s taxing requirements due to the mistaken belief that activities of a division and or sub-contractors do not create nexus, that product displayed or available for sell on a consignment basis does not create nexus or that salesmen calling on customers for orders accepted out-of-state does not create nexus. In reality all of these activities do, in fact, create nexus.
The virtual markets and the internet have expanded the proliferation of nexus questions traditionally brought forth by mail-order activity. An understanding of nexus and proactive state tax planning, prior to business expansion into other states, may eliminate burdensome filing requirements and costly penalties and interest for failure to comply.