Every day I get at least one news digest delivered to my inbox on state taxes. Over the past year it’s been an awful lot of the same. Broke states, hungry for money, are looking for tax revenue anywhere they can find it. And, having mined their own residents, states are now exploring creative ways to tax beyond their own borders.
We see their efforts all the time. The Internet Tax is one – with it, states are trying to force out-of-state retailers to collect instate sales tax when they sell to state residents. Or, even worse, states are taking aim at Internet retailer profits, saying that selling into the state amounts to a duty to pay income tax on those profits. That one’s being fought on several fronts.
Then there’s nexus creep. That’s where states try to grab neighboring state businesses and pull them in for sales and income tax. They do that by manufacturing a connection somehow. For example, maybe you drove across state lines to deliver something in person. Guess what! You now are a taxable business in the state you into. Or, you hire a virtual assistant who lives in another state. If you issue that person a W-2, all 50 states agree that you’ve just created tax nexus with them. In some states, hiring a 1099 contractor can be enough to do the same thing, especially if that person has no other clients and works for you.
- Do you maintain a telephone answering service in our state?
- Do you store any inventory or property in our state?
- Is your business listed in any telephone directories in our state?
- Do you mail advertisements or sales offers into our state?
All 4 of those questions, believe it or not, can create the tax connection nexus in the right circumstances. It all depends on how you answer the questions.
Ignoring the questionnaire may work in the short term, but depending on where you live and how aggressive the state auditors are, they may not just give up because you didn’t send it back. Instead, take the questionnaire to your CPA or tax preparer. Ask them how familiar they are with nexus and encroaching states. Then, go through your questionnaire with that tax professional and make sure you’re answering the questions honestly, yet carefully. Just because something can create nexus doesn’t mean it always will. It’s all in how you answer the question.