Nexus, or Out of State Trouble

Nexus is becoming an even hotter topic as the states attack. Nexus means connection, and in the tax world, it’s about who you owe returns and money to. In our electronic world, it’s easy to conduct business anywhere, and that has some challenging ramifications. If you never have out of state sales, skip to the next article. If you do, keep reading.

In the past, in order to have nexus in a state, you had to have some sort of physical presence or connection there. That has usually been defined as an employee providing some service or sales, in person. Employment was the key. For a travelling sales rep or service provider, there’s no easy way for anyone to know you’re there. And just how much time in the state is necessary before you have nexus? For pro athletes, one game! (The money is huge for them and it’s easy for the state to know they’re there.) For everyone else? That’s in the Courts’ hands. Of course, the abuses started by companies using contract workers/outside contractors instead of employees, to do the sales or install work. Clearly, that's a fairly close connection to the corp, but an independent relationship is just that: independent! But the states were able to pierce that thin veil and for the corp to file and pay taxes. And the states have just been pushing that rock further and further up the hill.

What’s driving this is that many states are broke, so they’re fighting for dollars that they believe belong to them. New York is one that believes that nearly everyone owes them money! And NY has been one of the most aggressive about passing rules that say that not only employees establish nexus, but any company that you use that provides services in the state for you. Think about that. Does that mean that if you’re in New Mexico and have a relationship with a firm in New York to install something that you sold, that you’re now operating in NY? NY says yes. And some courts have upheld it so far. Other states are following that lead. All this makes it extraordinarily expensive to do business since the books have to separate sales and payroll by state, and then we have to file and pay in each of those states. Failure to file opens up the worst penalties when you get caught, and often occurs too late for you to then amend your resident state returns to avoid double tax. And did I mention that for LLC’s and S Corps, this all opens up not only the business filing, but the personals as well since the income flows through? It’s ugly. It puts us on the defensive, often forcing us to file, costing you a lot of money in registration, fees, taxes, and accounting costs...just because the risk of losing is too great.

1099 Law is Dead, Ding Dong Ding Dong

Finally, some fortitude has been discovered on Capitol Hill after even the IRS said they could not handle the silly 1099 reporting rules created in the Healthcare Bill. So the Senate overwhelmingly just repealed it, and the House will soon follow, and the President has already said he'll sign it.

YAY! Sad to be this happy over something that should never have happened. And the reason it took so long? Well, this is the first leak in the dike of the Healthcare Bill, and you know that the supporters are terrified that once you break a hole in it, you might break open some more.

We can only hope.

(Note that this does NOT apply to landlords' mandatory 1099 reporting in 2011 for expenditures for services of $600 or more to unincorporated entities/individuals. So that's still on.)

Escape to Wisconsin stickers back?

Well, the IL dead duck legislature, before leaving office in minutes, thumbed their noses at big business and individuals in the state. IL now reportedly has the highest corporate income tax rates in the industrialized world. Think about that a moment. So while WI has learned that the big government/high tax experiment of the past dozen years was an utter failure, IL is figuring that they can pull it off. Meanwhile, Caterpillar and most other large companies are lining up the moving vans to go somewhere else, anywhere else, to do business. You'd think that high unemployment problems would give the politicos pause enough to wonder how to get more jobs, not less.

And while IL kindly doesn't tax pensions or social security benefits to try and encourage retirees to stay in the snowbelt, they just bumped the income tax rate by 67%!! which is unconscionable.

Kiss new employment goodbye, which will certainly strip off all that new revenue planned by the tax increases. Oh, and did I mention, every state that has ever raised taxes to get new revenue, actually saw a decrease in revenue as a result? Yes. History means nothing to some folks. Who pretend to represent us.

So dig out those old bumper stickers, Escape to Wisconsin, where they are now open for business, which has become the new slogan for the governor and legislature there. They're on to something. IL isn't.