States are always looking for revenue, and one of their favorite sources is you. Whether you’re an in-state retailer, facing tax on a service or product for the first time, or an out-of-state service provider who has been caught in a nexus trap, the bottom line is often more money out of your pocket, along with a massive amount of confusion, trying to figure out complicated and unfamiliar laws and regulations.
The complicated part kicks in almost immediately, as one of the very first things you face is trying to determine whether or not you’ve been dragged into another state’s tax system in the first place. Even some of the simplest, and most innocent-looking actions can create nexus!
Surprising Nexus Trigger #1: Advertising
Advertising has become an increasingly challenging area, and the rules are different from state to state. But there are some triggers which are relatively standard between states. Those include: advertising locally, using Yellow Pages, in-state Billboards, radio and television ads. You can also find yourself in trouble if you have a local telephone number listed for help, sales enquiries, and the like.
Does affiliate marketing constitute advertising? That depends on how the marketing is carried out. Passive web pages may not trigger nexus, but certainly any flyers, or local media-based advertising certainly will.
Surprising Nexus Trigger #2: Independent Sales Reps
If you believe that you’re safe from nexus, as long as you only hire 1099 contractors to represent you in a state, you could find yourself in trouble. That’s because almost ever state says that if you hire an independent contractor to provide services to your customers, that contractor will be treated as if they were a W2 employee of your business.
On the other hand, if those contractors are providing services to your business directly, and aren’t interfacing with your customers, you are likely going to be okay. Generally speaking, most state laws don’t see this provision of services to you as a nexus trigger. But that can change, depending on the level of control you have over that contractor. The more control over the contractor’s day you have – ie hours of work, working conditions, etc. – the higher the chance that contractor will be considered an employee, thus creating nexus for taxes in that state.
Surprising Nexus Trigger #3: Passive Ownership of a Business
Sometimes, simply owning a piece of a business located in another state is enough to give you a nexus headache. In September of 2010, New York decided that it could assess income tax on a company that had no connection to the state, other than being a passive owner in another, New York-based company. In another nexus case, between Amazon.com and the state of Texas, Amazon’s ownership in a local company was used help argue the state’s case that Amazon.com had enough of a connection to the state to require it to collect and remit sales taxes for all Texas sales.
Both the New York case and the Texas case are being appealed, but these states are not alone. Many other states attempt to tax pass-through income as well, by trying to recharacterize it as something which will fit into their existing tax categories. The rules are complex, and change from state to state.
Surprising Nexus Trigger #4: Temporary In-State Activities
Business travelers beware! In many states, attending a trade show or convention can create sales tax nexus for your business. This can be true, even if you don’t sell anything, but simply man a booth, handing out information, or inviting sales to be made through your company’s website, or directly to your company’s sales team in your home state.
Not all states are this aggressive, but for those that are, this can be a nasty surprise. For example, Illinois, Texas and Michigan both say that 1 day’s work in the state is enough to create sales tax nexus for at least the remainder of that calendar year. Minnesota says that 4 days is enough to do it, while California, somewhat surprisingly, will allow in-state activities for up to 14 days in a year before nexus requirements kick in.
Surprising Nexus Trigger #5: Significant Income Derived from the State
The “significant income” argument is one of the most recent developments with the states. This argument literally says that the amount of money you make in a state can be sufficient to create income tax nexus.
The amount you need to make isn’t always clear. Some states have adopted a “bright line” threshold ($50,000 in a year is a common number). Other states have nebulous standards. Connecticut, for example, simply states that a “significant” amount of income can create nexus in the circumstances. Does that mean what’s significant for one company isn’t for another? Is it percentage-based? We don’t know, and that kind of uncertainty makes for some difficult business decisions.
As a business owner, your challenge will be finding a CPA or tax advisor who can help you to stay up-to-date on changing tax laws and plan ways to reduce your overall tax exposure. If you need help, why not contact us to explore ways we can help you to design a tax and nexus strategy that works for your business. Get started today! Simply drop Thomas Mangum a line at Thomas@USTaxAid.com, or call him at 866.829.2368, Ext 2.