How many states do you owe tax in? You might be surprised. Many states are expanding their tax grab.
The issue is nexus. Nexus means connection. If you have a connection, or nexus, with a state you may be required to withhold and pay sales tax for sales in that state and/or pay state income tax.
Here are just a couple of recent real-life stories
Cost-cutting Move Creates Tax Problem
A bricks and mortar retail business in Maryland decided to warehouse some products in western US. It would mean they paid less freight cost shipping to west coast locations and could more easily service their clients.
What they didn’t take into account was nexus. They knew to avoid California because of the aggressive tax department. So, they set up in New Mexico.
And that’s when it got bad. If you warehouse product in New Mexico (NM), NM will consider that you have nexus. That nexus means you have to pay a gross receipts tax. That’s a tax on the gross sales amount. The amount of tax can be anywhere from 5% – 8%, depending on where the sale is made.
The Maryland company just picked up a whole lot of tax they didn’t expect.
What? I Owe California Tax?
California and New Jersey are the states we love to pick on when it comes to nexus. Don’t feel sorry for them! They deserve it!
California’s Economic Substance Nexus Test (quite a mouthful) means that that you don’t have to have any presence in the state at all. You don’t have to work there, own there, have a building or website there. All you need is to make 25% or more of your sales to California residents. If that’s the case, California says you owe tax.
That’s exactly what happened to a one-person company with a website selling products. She lived in Florida, didn’t travel for work and didn’t really track where her sales were, other than she knew to collect sales tax for Florida sales. And then one day she got a letter from the Franchise Tax Board, California’s taxing authority.
They were coming after her for back taxes. And they weren’t happy. Plus, because of reciprocity between California and Florida, there would be no problem sweeping out her Florida bank account if she didn’t toe the line.
Part of what makes this all so confusing is that it is not consistent from state to state as to what constitutes nexus. Each state and taxing district gets to decide what counts.
There are also three different definitions of what might happen when a company is determined to have nexus. The company may become:
- Subject to taxation by the state,
- Subject to service of process and suit in the state, and/or
- Required to qualify to do business in the state.
As CPAs, we focus on two of these things: taxation and the requirement to qualify to do business. The question of service and suit is a question for your lawyer, but it’s important. Here’s one quick example of why it’s important to know your company’s legal rights and responsibilities in a state.
Real Estate Owner Can’t Kick Out Deadbeat Tenant
Real estate investments are a great way to make money. That is, until they’re not. My husband, Richard, and I have always had real estate investments. And we got hammered in the downturn. But we ended up with real estate rentals again.
You do have risks, though. And one of them has to do with the tenants. What do you do if they stop paying you? Some states are easier than others to get a tenant out. For example, it’s only 5 days to get someone out in Nevada. But it can take months to get a non-paying tenant out in California.
One of our foreign investor clients purchased a property in the Midwest. He knew what the rules were for getting someone out, but there was one thing he hadn’t realized.
He had purchased a Nevada Series LLC and used the cells to hold his properties. In this case, the property with the deadbeat tenant was held in a NV Series LLC. He was already to kick out the tenant and that’s when he found out he had a problem.
The property was located within Ohio. That meant he clearly had Ohio nexus. But the property was held inside a Nevada LLC. That meant his company, which owned the property, did not have legal standing inside Ohio.
He couldn’t evict the tenant.
He had to get the NV cell authorized to do business in Ohio first, so that the court would recognize the company.
That took several weeks, and a lot more hassle, but in the end he did get his tenant out. Meanwhile, the tenant trashed the place and ran up the power bill.
Where do you have nexus? Is it income tax nexus? Sales tax nexus? Are you required to register in that state?
State tax laws are getting more complicated and if you get it wrong, you pay the price.
If you’ve got a tax question, please click on the right hand side of USTaxAid.com’s home page.
If you’d like a private tax consultation with me, please Contact Us.