I frequently get a question that starts with “I formed a Nevada LLC (or Corporation) so I don’t have to pay state income taxes and …” I don’t even listen to the rest of the question since I have to stop it right there. That’s because a NV business structure generally does NOT save you taxes, no matter what the promoter who sold you one tells you. The reason is something called “nexus.”
Are You Gambling With a Nevada Corporation?
There are actually two big hurdles to escaping state income tax from your home state.
(1) You have to be in a C Corporation. Any other form of business structures such as an S Corporation, LLC (default tax structure) or partnership is a flow-through entity. That means if you live in a state other than NV, the income from the business or investment is going to flow through to you anyway.
(2) If you have a C Corporation, there still needs to be nexus for the business inside the state of Nevada, in order for the taxability to stay within the state. This is where it gets trickier.
So, let’s talk a little bit about what nexus actually is.
If a state only has contact through the solicitation for orders of tangible personal property, which are then approved outside the state and fulfilled outside the state, there is no nexus. So, if you have a home state call center and fulfill your orders through Nevada, you probably have nexus in Nevada.
Other court cases have modified the rule of nexus to include the following items which can cause nexus:
- Post-sale activities, including training, installation, consulting, etc. (activities clearly exceeding a request for orders or sales and therefore nexus-creating);
- Pre- (or post-) sale activities, including repairs to products, credit checks and investigations, customer services, inventory testing or analysis (again, activities that will likely exceed current nexus standards).
Additionally, if a taxpayer owns property and maintains more than a de minimis physical presence in a state, nexus Is likely.
The above related to sales of products. The rules for sales/performance of services is a little different.
You have nexus in a state if you: have:
- Performance of services, ownership of property (whether income producing or not, in most cases) or resident salespersons.
- Maintenance of an office (even if entirely dedicated to solicitation of orders), franchise contracts, some licensing arrangements, lease transactions or secured (or collateralized) property.
Nexus is getting tougher. States need money and the Internet has blurred the lines when it comes to physical presence. Some things to make sure you’re doing:
- Understand clearly whether you’re selling product or services within the state under question
- Thoroughly document the selected standard for a company’s facts and circumstances.
- Always provide a detailed response (never a “yes” or “no” answer) to a state’s nexus questionnaire.
- Hire a professional, like one at [www.DKAffiliated.com] (http://www.dkaffiliated.com) to walk you through these murky waters.