Hans Kasper, MS-CPA, PS

Nexus and Doing Business In Other States
 

As a business registered and incorporated in the the State of Washington, if you transact business with customers or clients in other states, you may be liable in those states for:

• corporate and personal income taxes,

• corporate or business licensing registration,

• sales or franchise tax, and

• payroll taxes in those states.

This would happen when you have created something called NEXUS in those states.  Nexus is a legal term that means that once you have done business in another state that you are now legally connected or linked to that state.

Nexus

What is Nexus?

Nexus is defined as: A sufficient presence within the jurisdiction of a taxing authority.  The taxable income of a multistate corporation may be apportioned to a specific state only if the corporation has a sufficient nexus in the state.  The nexus for state sales tax purposes requires a physical presence in the taxing state, and the nexus for state income tax purposes requires more than mere solicitation.

In other words, each state may be different as to how they define and apply nexus, and definition may be different within a state for sales tax and for income tax.  There is currently a multistate commission that is trying to get all states to define nexus in the same manner.

If you are unsure if you have nexus in the state that you are selling into FOR SALES TAX, call the company you are selling to and have them fill out the multistate uniform sales and use tax exemption certificate.  If they do not fill out this certificate, I would charge them the sales tax for their location within their state.  This means that you will have to register for a sales tax permit in that state.  If you do not collect the sales tax when you should have, then, if you are audited by that state, you will be responsible for paying the sales tax and may not be able to collect it from the customer at that later date.

If you are unsure if you have nexus in the state that you are selling into FOR INCOME TAX, follow the solicitation rules below and read the nexus links provided for each state in the grids below.

When does Nexus apply?

Remember that within each state the definition for nexus for sales tax may be different from the definition for income taxes.

Go to each state below to click the nexus sales tax and income tax links.

How can I avoid income tax Nexus?

The following is based on Public Law 86-272.

Only the solicitation of sales orders defined as “speech or conduct that explicitly or implicitly invites an order, but does not take or make an order” (California) can exempt you from income tax nexus creation while you are inside of a state.

• Example 1: A sales person for a Washington company goes into California to meet with potential or existing customers and discusses the company’s  product lines with each customer.  She invites them to place their orders using the company’s web site.  At this time, this form of solicitation does not create nexus.

• Example 2: Same as the above, except she takes their orders at the time of the visit.  This is not a solicitation; this is the taking of an order while in the state and does create nexus.

• Carefully read each state’s nexus rules and do not perform those activities that create nexus.  Below is a partial listing of what NOT TO DO.

  • make repairs or provide maintenance or service to property sold or to be sold while in that state;

  • collect current or delinquent accounts, whether directly or by third parties, through assignment or otherwise while in that state;

  • investigating credit worthiness while in that state;

  • installing or supervising installation at or after shipment while in that state;

  • conducting training courses, seminars, or lectures for personnel other than personnel involved only in solicitation of order while in that state;

  • providing any kind of technical assistance or service including, but not limited to, engineering assistance or design service, when one of the purposes thereof is other than the facilitation of the solicitation of orders while in that state;

  • investigating, handling, or otherwise assisting in resolving customer complaints, other than mediating direct customer complaints when the sole purpose of such mediation is to gain influence for the sales personnel with the customer while in that state;

  • approving or accepting orders while in that state;

  • repossessing property while in that state;

  • securing deposits on sales while in that state;

  • picking up or replacing damaged or returned property while in that state;

  • hiring, training, or supervising personnel other than personnel involved only in solicitation while in that state;

  • maintaining a sample or display room for a period greater that two weeks (14 days) at any one location within that state during a tax year;

  • carrying samples for sales, exchange, or distribution in any manner for consideration or other value while in that state;

  • owning, leasing, using, or maintaining any of the following facilities or properties in that state:

    • repairs shop;

    • parts department;

    • any kind of office other than an in-home office;

    • warehouse;

    • meeting place for directors, officers, or employees;

    • telephone answering service that is publicly attributed to the company or to employees or agents of the company in their representative capacity;

    • mobile stores such as vehicles with drivers who are sale personnel making sales from the vehicles while in that state; and

    • real property or fixtures to real property of any kind;

  • consigning sale stock for goods or other tangible personal property to any person, including an independent contractor;

  • set up a warehouse in that state to house inventory.

SALES TAX NEXUS: In Washington, solicitation of orders while inside the state creates SALES TAX nexus.

Once Nexus applies, what do I have to do?

• For sales and use tax and for income tax, you must register with the state corporations division.  For sales and use tax, register with the state sales and use tax division. 
   

• For income tax, you must register with the state income tax division. 
   

• For owners of “S” corporations or Partnerships (includes LLCs taxed as partnerships), you may have to file a personal income tax return in the state where nexus has been created by your business. 
   

• For payroll taxes, if you have an employee that lives in that state, you must register with the state employment division for unemployment tax and state withholding tax, and you must determine how workmen’s compensation (labor and industries tax in Washington) is handled in that state so that you are correctly covered.

Links by state:  California, Oregon, Washington, Montana, Idaho, Alaska