I Have to File Where? The Two Paths to Income Tax Nexus

This post is in: Business


Every business owner who ships a product or has a download product needs to read today’s blog. Please tweet it or email a note to your friends and associates.

Today’s issue deals with the two different ways that your business may have to pay state income tax.

The first one, the one most accountants are used to, is the physical presence nexus test.

In this case, you need to have some kind of presence in the state. That means you’ve got inventory, an office, a warehouse – something that links you to the state.

For years, it was pretty clear cut. If you didn’t have an office or building of some kind, you probably didn’t have nexus for income tax purposes.

But, as we learned yesterday, the MTC is changing a lot of things. The new test that many states are adopting is no longer just based on physical presence. The new test is economic presence.

A fairly common standard is that you have income tax nexus if you have physical property, personal property, a certain amount of payroll or 25% or more of sales to residents of the state then you’ve got income tax nexus. That means if you meet one part of this test, you have nexus in another state.

For example, let’s say you have a business located in Kentucky and sell to customers in California. If 25% of your gross income comes from sales to California residents, then you’re going to have to file a state tax return for both Kentucky and California.

Right now the following states have adopted some version of ‘economic presence’ as a test to determine nexus.

  • Arizona
  • California
  • Colorado
  • Connecticut
  • Florida
  • Indiana
  • Louisiana
  • Maryland
  • Michigan
  • Minnesota
  • New Jersey
  • New Mexico
  • North Carolina
  • Ohio
  • Oklahoma
  • Oregon
  • South Carolina
  • Tennessee
  • Texas
  • Washington
  • West Virginia
  • Wisconsin

There are two things you need to do if you sell to anyone in another state:

    1. (1)Take advantage of our special offer at USTaxAid. When you buy the State Nexus Handbook for just $97, you’ll get the information you need to get started with Nexus Planning right now. State Nexus Handbook. Plus, we’ll let you know when you can pick up the expanded State Income Tax Nexus Handbook (regular price $129) for FREE!
    1. (2) Review the information with your tax accountant. Make sure he or she is up to date with what you need to do. You do not want to run afoul of another state!

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