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Crossing State Lines? Know about Nexus

For many years, business owners had to ask themselves one question when it came to facing taxation in another state: Do we have “nexus”? This term indicates a business presence in a given state that’s substantial enough to trigger the state’s tax rules and obligations.

The question is still a valid one. If you’re considering operating your business in multiple states, or are already doing so, it’s worth reviewing the concept of nexus and its tax impact on your company. H&M can help you do that, but here is some basic information:

Common criteria

Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:

  • Employing workers in the state,
  • Owning (or, in some cases, even leasing) property there,
  • Marketing your products or services in the state,
  • Maintaining a substantial amount of inventory there, and
  • Using a local telephone number.

Strategic moves

As with many tax issues, the totality of facts and circumstances will determine whether you have nexus in a state. So it’s important to make assumptions either way. The tax impact could be significant, and its specifics will vary widely depending on just how the state in question approaches taxation.

For starters, strongly consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you. The results of a nexus study may not necessarily be negative. You may find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

Taxation and profitability

The grass is always greener on the other side of the fence… so the saying goes. If profitability crosses state lines, please contact H&M for help projecting how setting up shop there might affect your tax liability.