Nexus and State Tax Responsibilities

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With lots of people wanting to start businesses to create some additional income, I’m fielding an increasing number of questions from people about Nevada, and whether having a Nevada-formed business can help them to save tax dollars.

In most cases the answer is no! Don’t be fooled into spending more than you need to, when beginning your new business venture.

Nexus is a fancy word for business and tax location. Sometimes it’s simple. Your local grocery store has nexus in your home state. It has a physical location and earns income in your state through its business activities.

Internet businesses are tougher to classify. It’s easy with a business like mine – even though we do business over the Internet, the services are all performed at my location in Nevada. So my business nexus is Nevada. The same would apply if I sold things through my website and shipped from my location in Nevada. In my case it’s beneficial to be located in Nevada. There is no state-level income tax on individuals or on businesses. I pay federal taxes only on my income, and the income of my business.

This is one of the first places people get into trouble. Unscrupulous promoters will tell you that by forming your business in Nevada, you too can avoid state income tax, even though you may live and operate a business in a state that does charge income tax. But that often isn’t true. If your business earns income through activities you carry out or products you ship from your location, then regardless of where you incorporate, your tax nexus is your home state.

Don’t be fooled by people who tell you that by paying extra to have a Nevada mailing address, or a Nevada telephone number, or a “virtual” office, you can beat the nexus argument. None of those things are enough to make the argument stick.

But with other Internet businesses, it’s not so easy. Say I had an Internet business that was a catalogue site. I made arrangements with various wholesalers, and displayed their merchandise on my site. Anyone buying through my site has their orders shipped directly from the wholesaler. I am not providing a service, nor am I shipping a product. It is a purely passive business. Now where is my nexus?

In a case like this, you have a better argument that your business can establish its tax nexus where it likes. You could theoretically incorporate a Nevada business to hold this operation. However, in order to see tax savings, you need to plan it carefully. Not all business structures will give you the tax savings you’re looking for. There’s only one that will, actually, and that’s a C Corporation. Even so, you still won’t escape state taxes on the income entirely.

If you think you’ve got a good argument to escape your state’s tax nexus, talk to an advisor before you proceed. If you’re not sure about your argument, come talk to us on the Forum!

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