Conventional wisdom holds that only death and taxes are certain. The tricky part, however, is that sometimes tax obligations aren’t certain. For multi-state business owners, determining what you owe (and where you owe it) can be complicated.
Consider the following brain-teaser: A Wisconsin-based DTC pickle company grows cucumbers outside of Milwaukee, pickles them on site, and ships them to individual consumers all over the country. As the business grows, it retains the help of a New Jersey-based marketing professional and a fulfillment consultant in Michigan. Where does this business owe state taxes? In Wisconsin only? In Wisconsin, Michigan, and New Jersey? In every state where a consumer buys a pickle?
The answer depends on the business’ specific operations, its income in each state, and the individual state tax policies.
What is tax nexus?
Tax nexus is a relationship between a business entity and a taxing jurisdiction. If your business has tax nexus in a state, you may need to pay taxes there—if you don’t have nexus, you’re off the hook.
For multi-state business owners, determining nexus can be complicated. As more businesses hire remote employees and online commerce accelerates (and states alter their tax codes to keep up), it’s also becoming an increasingly common business task.
4 Types of tax nexus
There are four primary types of tax nexus.
- Corporate income tax nexus. Corporate income tax is a tax based on and levied against the profits of certain business entities or tax categories—C corps and, in some states, S corps. If you have corporate income tax nexus in a state, you may need to pay state income taxes based on the profits earned in that state.
- Sales tax nexus. Sales tax is a tax paid by consumers at the point of purchase for particular goods or services. If you have sales tax nexus in a state, your business may be responsible for collecting sales tax there: Your customers will be charged sales tax, and your business will remit sales tax to the state’s taxing jurisdiction.
- Excise tax nexus. Excise tax is a tax levied against particular goods or services. It typically applies to goods or services considered socially harmful (such as alcohol, tobacco products, marijuana, air transportation, and firearms). It can be charged to the consumer, the retailer, or the manufacturer. If you have excise tax nexus in a state, you may be responsible for remitting excise taxes to that state’s taxing jurisdiction.
- Franchise tax nexus. Certain states require all businesses to pay a fee (known as franchise tax) for the privilege of doing business in the state. If you have franchise tax nexus in a state, you may be required to pay this fee.
Determining nexus: Factors that contribute
Different states use different measures to determine tax nexus, which can make tax compliance complicated. To conclusively determine where you have nexus, you’ll need to comb through state-specific requirements or consult the help of a tax attorney or compliance platform.
Although individual qualifications vary, there’s a lot of overlap in the factors states consider to determine nexus. Here’s an overview of factors commonly used to determine each nexus type.
Determining corporate income tax nexus
You might have corporate income tax nexus in a state where your business:
- Retains employees or contractors, or performs work
- Earns income
- Owns or rents property
- Stores inventory or assets
- Attends a tradeshow or engages in in-person sales activities
- Is registered with the secretary of state
Simply meeting one or more of these qualifications, however, doesn’t necessarily mean that you have to file taxes. As an example, Michigan considers a business to have corporate income tax nexus if it meets either of the following conditions:
- It has an employee or contractor in the state. Michigan considers having an employee or contractor in the state to constitute “physical presence” and establish nexus.
- It earns more than $350,000 in gross receipts in the state. If a business earns $350,000 or more in gross receipts apportioned to the state, it has income tax nexus in Michigan and is subject to the state’s corporate income tax policies.
Although having an employee in the state constitutes nexus, Michigan businesses are only required to file and pay corporate income tax if they meet the $350,000 filing threshold (plus an annual liability threshold of $100 or more). You aren’t required to file if you have an employee or contractor in Michigan but don’t meet the $350,000 filing threshold or the $100 liability threshold.
Sales tax nexus
As with all nexus types, different states apply different criteria to determine sales tax nexus. There are also multiple types of sales tax nexus, which further complicates the picture. Here’s an overview of the types of sales tax nexus and common qualification criteria.
- Economic nexus. Whether or not your business has economic sales tax nexus in a state depends on your amount of sales in that state. States may consider both gross receipts and number of transactions. If your sales exceed the sales threshold in either category, you may be responsible for collecting sales tax.
- Physical nexus. Having a physical location, resident employee, or owner in a state can establish physical sales tax nexus for out-of-state sellers. Depending on state regulation and individual business activities, you might also have physical nexus in states where you employ staff or independent contractors, own property, or attend a trade show.
- Affiliate nexus. If your business has an affiliate retailer in a state, you may have sales tax nexus in that state. Affiliates can be either physical retailers or online sellers that earn commissions for referring companies to your business.
Before 2018, states typically needed to establish physical nexus to enforce sales tax collection for out-of-state state retailers, but the 2018 Supreme Court ruling South Dakota v. Wayfair, Inc. made it significantly easier for states to establish sales tax nexus for online sellers. This decision upheld a South Dakota policy establishing nexus for goods delivered into South Dakota, regardless of the buyer’s or seller’s location at the time of the sale. Almost every US state now has a law modeled on the South Dakota ruling, allowing taxing jurisdictions to use economic measures to determine sales tax nexus for online sellers.
As an example, California requires businesses to collect and remit sales tax if they meet any of the following conditions:
- Have a physical location in the state. If you maintain, occupy, or use (directly, indirectly, or through a subsidiary or agent) a permanent or temporary office, place of distribution, sales or sample room, warehouse or storage place, or other physical place of business, you have sales tax nexus in California.
- Have people in the state. If you have representatives, agents, or independent contractors operating in California on your behalf, under your authority, or under the authority of your subsidiary for purposes of making sales, taking orders, assembling or installing merchandise, training, customers, making deliveries, or otherwise establishing or maintaining a market for your product, you have sales tax nexus in California.
- Rent or lease property in the state. If you receive rental payments from the leases of tangible personal property located in California (such as leases of machinery, equipment, and furniture) or own or lease real property or personal property, such as machinery or equipment, furniture, or computer servers in the state, you have sales tax nexus in California.
- Earn enough money in the state. If you have total combined sales of tangible personal property for delivery in California exceeding $500,000 during the preceding or current calendar year, you have sales tax nexus in California. This typically excludes SaaS products delivered remotely.
Excise tax nexus
Although standards vary by state, many states determine excise tax nexus using the same factors applied to income tax nexus and sales tax nexus (such as having employees, owning assets or property, or exceeding a specific sales threshold).
As an example, Massachusetts applies corporate excise tax nexus to businesses that meet any of the following conditions:
- The business is registered with the state. Corporations registered with Massachusetts automatically have nexus for excise tax purposes.
- The business has employees in the state. Massachusetts considers the “employment of labor” to establish excise tax nexus.
- The business exceeds the sales threshold. If you have more than $500,000 in sales in Massachusetts, you have excise tax nexus in the state.
Determining franchise tax nexus
Some states consider business activity when determining franchise tax nexus, and others establish franchise tax nexus based on registration only—in other words, you might owe franchise tax in any state where you are registered, even if you aren’t doing business there.
For example, New York requires all registered corporations to pay franchise tax regardless of business activities in the state.
Complying with tax nexus
- Determine where you have tax nexus
- Confirm state registration
- Determine your tax rates
- Open tax accounts and file your taxes
Tax compliance is important to overall business compliance: If you don’t pay, your business may face fines and other penalties. Follow these steps to maintain compliance.
1. Determine where you have tax nexus
Identify every state where you perform business activities and determine whether you meet nexus thresholds. This can be complicated: If you are a remote seller with employees in nine states and sales in 37, you could potentially have tax nexus in 46 different states. You might owe sales tax in one state, both sales and income tax in another, only franchise tax in a third, and all four types of tax in five others.
To make things easier, keep careful records of sales and business activities and seek help from a tax attorney or a compliance platform, like Mosey.
2. Confirm state registration
If you have nexus and owe taxes, you need to open tax accounts with the Department of Revenue. Because some states don’t require out-of-state sellers to register or remit taxes until they meet certain income or sales thresholds, you may need to monitor sales on an ongoing basis to determine when you’re required to pay taxes.
3. Determine your tax rates
Determine your tax rates and total obligations in each state. At 50 states and DC (plus four nexus types), that’s a total of 204 sets of state-specific tax laws to navigate. In other words, it’s a lot. Consult a tax attorney or use Mosey for help identifying the types of tax you might be required to pay.
4. Open tax accounts in each state and file your taxes
To pay your taxes, you’ll need to open a tax account in every state where you have nexus. Once you’ve opened accounts, follow state-determined filing processes to remit taxes to each state.
Mosey is a complete compliance solution for multi-state businesses. Once you import your company information, our platform will automatically determine your requirements across HR, payroll, tax, registration, insurance, and more. Our always-on monitoring system will alert you of upcoming deadlines, tasks, and new legislation. Mosey will also help you open the accounts you need to be compliant in all states. Want to learn more? Schedule a demo—our team is excited to meet you.