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.