The dictionary defines the word “nexus” as a connection between two or more things. In taxes, it’s a key word that has a potentially big impact and state and local taxes. It’s easier to think of nexus as meaning “presence.”
Nexus, or a business’s presence, in a state, is created by a variety of factors:
- Owning or leasing property in a state: offices, warehouses, or stores
- Generating income in a state from a store or from a substantial number of customers who live in the state
- Hiring employees or contractors (including remote workers) that live or work in the state
A company can have nexus in many states at once. For example, a business operating in California that sells books that are stored in a warehouse in Indiana has nexus in both states. The warehouse generates physical nexus.
There is also economic nexus. This is when enough customers in a state purchase a company’s goods. A 2018 Supreme Court case, South Dakota vs. Wayfair, opened the floodgates for states to impose economic nexus on businesses. As of this writing, 43 states have enacted laws to create economic nexus for certain businesses. It is usually required after a business has reached a threshold of sales in dollars or number of customers. Economic nexus requires businesses to collect and remit state sales tax on sales of taxable items, which helps the states to raise revenue.
The locations of a business’s employees and contractors could also trigger nexus. Not only is a business impacted with this type of nexus, the employee’s tax liabilities may be affected as well. With so many working remotely due to the pandemic, these workers are probably not aware of how state tax laws could potentially impact them.
For example, an employee working from home in Michigan for an employer based in Pennsylvania could potentially be subject to Pennsylvania income tax as well as Michigan. The laws for permanent and temporary relocations are different and complex; it’s best to check with a tax professional to help you determine which states you might have nexus in.
If you operate a business with employees, property, or sales in more than one state and are not sure about your responsibilities with regard to nexus, please feel free to reach out so we can help.