There are two types of nexus (connection) rules to be concerned with. There is the nexus that puts you into a state’s income tax system and the nexus that means you now have to collect sales tax for any products or services subject to sales tax within that state.
Most of the noise we’ve heard lately has been about sales tax. The ‘Amazon’ tax is a nexus issue. Basically, if an affiliate is within a state that has the ‘Amazon’ tax law, then that company now has nexus for sales tax purposes. It’s an accounting and tracking nightmare, so Amazon (and others) have simply dropped any state that passes the ‘Amazon’ tax. Right now, New York, North Carolina and Rhode Island have the ‘Amazon’ tax. And Colorado just added their own ‘Amazon’ version that is much worse.
Tomorrow, we’ll talk about the Colorado example and why you better hope it’s not coming to your state. (And our sympathy if you happen to live in Colorado and used to be an affiliate, or wanted to buy something off the Internet at some point in your life.)
When Does a State Get to Claim Nexus?
Let’s look at nexus that is created for income tax purposes. Remember that this is also applicable for the Texas Margin Tax and for New Mexico Gross Margin Tax as well. But for now, we’ll just call it ‘income tax’ although it isn’t always a tax on net income.
Generally, there is nexus created for income tax purposes if you
- Get income from sources within the state,
- Own or lease property in the state,
- Employ personnel in the state in activities that exceed “mere solicitation,” or
- Own capital or property in the state
The amount of activity or connection that is necessary to create nexus is defined by state statute or case law and/or regulation and, consequently, tends to vary from state to state. However, all states are limited by Constitutional principles, judicial doctrine and federal law.
Things You Need to Do
- Determine where you may have nexus,
- Research: Is this sales tax nexus or income tax nexus?
- Continue reading this blog series!
Resources to Help You:
Thursday, Colorado’s Dangerous New Tax Example