Your biggest tax issue for 2010 and beyond could very well be something you’ve never even heard about: nexus. But the tax risk isn’t from the increased IRS audit force, or the hundreds of federal tax law changes that happen every year.
The tax issue is with your state. Or the state next door. Or a state you’ve never even visited.
If you have a business, you are taxed based on where your state has nexus. Nexus means connection. If you have a business located in Texas, you have nexus in Texas. That means if you sell something to someone who lives in Texas you should collect and pay sales tax to the state. Of course, that’s assuming that the product is subject to sales tax.
If you sell something to someone who lives in Oregon but you don’t have any connection, or nexus, with Oregon, you don’t have to collect and pay sales tax.
On the surface that sounds pretty straightforward. But in our current economic times, everything has gotten more confusing.
YOU Are the Only Economic Stimulus Plan Most States Have
Let’s face it. Almost every state is looking at budget deficits. That means fewer services and more taxes.
States are looking for new and different ways to raise taxes. They’re also looking for ways to increase their tax reach to the residents of other states.
That’s where nexus becomes so important. If another state can prove you have a foothold in their state, they can make you responsible for collecting and paying sales tax and perhaps even paying that state’s income tax.
What is Your Nexus Footprint?
If you have nexus in another state, then you have a nexus foot print.
A survey of product sellers by Sabrix (a sales tax software provider) found that 95% of all businesses (small, medium and large) had underestimated their nexus footprint. Out of 100 companies, 95 had it wrong.
Your business could easily have more than one nexus footprint. Here are some common things that might create nexus for you:
Hiring an employee
Having a tradeshow
Owning real or tangible personal property
Having a sales function
When it comes to nexus – what you don’t know, can hurt you!
What Now?
The first step is to determine where you might have a nexus issue.
Then, come clean with the least amount of tax fuss as you can. You will probably need a tax professional helping you with this step.
First, though, discover how much of a risk you have. You can find helpful checklists and information in Smart Business Stupid Business.
About the Author: Diane Kennedy, CPA is the co-author of “Smart Business Stupid Business” and 7 other books. Find out more about nexus and other critical business topics to make your business smarter! You can find Diane at www.SmartBusinessStupidBusinessOnline.com, www.USTaxAid.com and via twitter at Twitter.com/DianeKennedyCPA.
