There is a cross-border tax grab happening right now and you might not know anything about it until you get the notice that someone’s about to sweep out your bank accounts.
The issue is something called nexus. Nexus means connection. If you have a connection with another state, according to that’s state definition of what the nexus is for, then you have a tax issue.
Here are the three things you need to know about nexus:
- Each state, and the District of Columbia gets to decide that jurisdiction’s definition of nexus. You potentially have 51 different jurisdictions.
- There are three different areas of nexus: income tax nexus, sales tax nexus and ‘other’ tax nexus.
- Once you have nexus to an area, you have to conform to that state’s rules. In other words, if you have sales tax nexus in Arizona, than you have to follow Arizona’s rules for sales tax nexus.
Last December, Mattress World in Oregon shut down forever because they got hit with a sales tax bill from neighboring Washington. They never had sales people in Washington. They didn’t have a store in Washington, but they had triggered Washington sales tax nexus and failed to collect and pay it.
Nexus can shut your business down too. Some of the unexpected nexus triggers include:
- Speaking at an event in another state
- Hosting your website on a server in that state
- Having affiliates in another state
- Hiring a virtual assistant in another state
- Selling more than $50,000 worth of goods or services to people in another state or
- Any of the hundreds of crazy nexus-causing rules we’ve identified
If you have a business, you don’t want to ignore nexus. Here are three steps to make sure you’re in compliance:
- Have a Nexus Evaluation to determine your risk
- If you have a past issue, hire a Nexus Negotiator to negotiate a Voluntary Disclosure Agreement (with reduced tax, penalty and interest)
- Come into compliance with a strategy to minimize your tax impact in other states
Make sure your tax preparer understands the growing issue of state tax nexus and cross-border tax grab. You may owe tax in other states. Don’t get caught unaware!
About The Author
Diane Kennedy, CPA helps business owners legally pay less tax. She’s the New York Times best-selling author of “Loopholes of the Rich”, “Real Estate Loopholes”, and 7 other best-selling financial and tax books. She’s also a business owner and real estate investor. Her motto is “It’s Your Money. Keep More Of It.” Learn more about Diane by visiting USTaxAid.
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Nexus is one of the sleeping giant problems that most businesses just don’t know or understand. But sadly that as we all know isn’t a defense when the tax bill arrives. And as the states are caught in budget shortfalls we have seen them turn more and more to strengthening and tightening up sales tax collections.
For most states that has lead to nexus being looked upon at the answer to this short fall. So the states have undertaken to effectively try and make sales taxes the responsibility of all businesses even those that have no effective physical presence (nexus) in the state of the sale.
That just means that we have to get out the word if we are going to protect companies that sell across state lines without collecting sales taxes from being in violation of what has became a morass of conflicting rules.
Nexus will only grow as an issue that will trip up many small businesses our job is to catch them before they fall.
Absolutely Frank! Thanks for your comment!