The hottest tax topic these days is nexus. Nexus means connection. If you have a connection (or nexus) to a state, then you could have some tax issues you don’t even know about.
#1: Verify Potential Nexus Issues
There are two potential concerns for nexus.
(1) Sales tax. If you are found to have nexus in another state, you’ll be responsible for collecting and paying sales tax when you make sales in that state.
(2) Income tax. If you are found to have nexus in another state as related to income tax, you’ll have to apportion your income and pay tax in another state.
It’s complicated enough without the weird state laws that keep popping up. We’ve got a couple of them noted in #2.
#2: No Clear Nexus Definition
A few decades ago, the US Supreme Court ruled that a business had to have a physical presence inside a state for the state to be able to declare nexus. This was related to state income tax and for a long time, that was good enough for sales tax nexus as well.
Then the Internet took off and millions of dollars of sales suddenly started running through without any sales tax at all.
That’s the gap that states have tried to close by creating new definitions for nexus, at least as it applies to sales tax.
You can have nexus by owning property (real or personal) within a state, by having a sales function, by having employees, or by living in a state.
That’s when the ‘Amazon’ tax laws started. So far, Rhode Island, North Carolina and New York have jumped on that band wagon. Then Colorado passed their own version which calls for reporting anyone who doesn’t pay sales tax at the time of sale.
If you sell anything on the Internet, then you need to get the best information possible! Remember, your responsibility is to collect and pay. If you don’t collect correctly, you’ll still have to pay.
#3: Look Out For State Statute of Limitations
That means that as long as you didn’t commit fraud or grossly misrepresent your tax situation, you’re home free 3 years after filing your return. And if you owe the tax man, they only have 10 years to collect the money.
Don’t make the assumption that your state has the same deal. For example, Arizona has a 6 year statute of limitation on audits and a 6 year statute on collection of back taxes. California has NO statue on collection. They can chase you down till the day you die. New York has a 3 year statute on audits and 20 year statute on collection of back taxes.
If you file in multiple states, you’ll have to keep track of records longer than you might otherwise expect.