SURPRISESMAY BE GREAT FOR A BIRTHDAY, BUT RARELY ARE they great in business. One significant, unwanted surprise when it comes to state taxation concerns the concept of nexus. Having nexus in a state—unexpectedly—often leads to costly results. In this article, we review the concept of nexus, how it can be avoided (or obtained), and actions you can take if your company or client is faced with unexpected nexus in a state. What Is Nexus? Under the U.S. Constitution, a state cannot impose tax on a taxpayer without some connection between the taxpayer and the state. In brief, nexus is a sufficient connection between a state and a taxpayer that allows the state to impose its taxing jurisdiction on that taxpayer. In other words, if a taxpayer has nexus in a state, that state can require the taxpayer to collect tax and pay tax. The nexus connection is typically established in one of two ways: physical presence or economic presence. Physical presence means a taxpayer has some physical connection in the state. For businesses, this canmean the business has property in the state (including storing tangible personal property), a location in the state, or employees in the state. Economic presence means a taxpayer makes sales into a state or conducts other business or economic activity in that state. For many years, the concept of nexus by economic presence alone was permitted for state income tax but not sales tax. That was overturned in the recent U.S. Supreme Court case South Dakota v. Wayfair Inc. Now, a state can require the payment of income tax, and the collection of sales tax, from companies that only have an economic presence in that state. Therefore, businesses should be careful about when they have a new office, new employee, or new marketing S TAT E TA X B R I E F I N G BY NICK NIEMANN & MATT OTTEMANN, McGRATH NORTH LAW FIRM THE MOST UNWANTED SURPRISE IN STATE TAXATION: NEXUS I S S U E 5 , 2 0 2 2 18 nebraska cpas
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