I just recorded an online workshop on state tax issues with the title “Don’t Mess With Nexus.” I liked the title so much I’m re-using it for this blog! Well, it also means I’m going to talk about nexus.
If you have a business and aren’t familiar with the term “nexus” you soon will be. That’s because there is a big fight brewing between the states and who gets to claim nexus on your business income.
It used to be easy. If you had a business, you had a storefront and people came to you. They bought items in your store. If you were in most of the states in the US, you collected sales tax on the product sales and then remitted them on a regular basis to the state and/or local taxing authority. You also paid tax on the net (and rarely gross) income of the business to the state.
But then the lines got fuzzy. People began outsourcing part of the work. Your store front is in Iowa, might have a call center in Michigan. And you might ship products out of drop shipper in Florida. When do you collect sales tax? Where do you pay state income tax?
Or, let’s make it even tougher. Let’s say that you have a virtual business. Where is the business located? Somewhere in the electrons flowing back and forth. Where on earth do you tax that?
Well, a couple of states have drawn lines in the sand. For example, in New York in what is now popularly called the Amazon Tax, if you have New York resident affiliates selling your products, you have New York nexus when it comes to sales tax. That’s even if your business is located in Wisconsin and your client is in New Jersey. New York wants their piece of the pie. And, of course, the other states aren’t keen on sharing.
California now has drawn their own particular line in the sand. They say if 25% or more of the workforce (this could mean employees and/or independent contractors) are located in California, then they’re considering the business a CA business. Oh, and if you own a company, no matter where it is set up and how it is structured, if you’re a CA resident, it’s a CA business.
I don’t know if California can get away with this over-reaching for long. Meanwhile, though, don’t assume that you have the latest and best information when it comes to nexus. It can catch even the most seasoned tax pros unaware if they aren’t watching EACH state’s laws.