Nexus (Tax)

Nexus is the threshold concept in state and local taxation. It answers the fundamental question: does a state have the right to tax your business? Understanding nexus is essential for any business operating across state lines.

What Creates Nexus?

Physical Nexus

Traditional nexus based on physical presence:

• Offices or facilities: Owned, leased, or shared workspace
• Employees: Staff working in the state (even remotely)
• Property: Inventory, equipment, or other tangible assets
• Representatives: Agents or independent contractors performing services

Economic Nexus

Nexus based on economic activity, not physical presence:

• Sales thresholds: Typically $100,000 in sales into the state
• Transaction thresholds: Typically 200 transactions
• Applies to: Sales tax (post-Wayfair) and increasingly income tax
• Varies by state: Each state sets its own thresholds

Affiliate/Attributional Nexus

Nexus created through related entities:

• Related companies with physical presence
• Click-through nexus (affiliate marketing)
• Marketplace facilitator nexus
• Agency relationships

Types of Tax Nexus

Sales Tax Nexus

• Obligation to register, collect, and remit sales tax
• Post-Wayfair: economic nexus is the dominant standard
• Must track sales into every state to monitor thresholds
• Registration required before collecting tax

Income Tax Nexus

• Obligation to file state income tax returns
• Physical presence still primary standard (but evolving)
• Economic nexus for income tax adopted by growing number of states
• Factor presence tests becoming more common

Payroll Tax Nexus

• Created by having employees in a state
• Withholding obligations for the state
• Unemployment insurance filing requirements
• Workers' compensation obligations

Nexus Studies

CPA firms perform nexus studies to:

1. Identify exposure: Determine all states where nexus exists
2. Quantify liability: Estimate unpaid tax obligations
3. Recommend action: File voluntarily or pursue voluntary disclosure
4. Implement compliance: Register and begin filing
5. Monitor ongoing: Track activities that create new nexus

Voluntary Disclosure Agreements (VDA)

When a business discovers unreported nexus:

• File a voluntary disclosure with the state
• Typically limits look-back period (3-4 years vs. unlimited)
• May reduce or eliminate penalties
• Administered through the Multistate Tax Commission or directly with states
• Must be filed before the state contacts the taxpayer

Remote Work Implications

The rise of remote work has created significant nexus challenges:

• Employees working from home in different states create nexus
• Temporary presence rules vary by state
• Convenience of the employer rules (some states tax remote workers)
• Tracking employee locations has become essential

Best Practices

1. Monitor continuously: Track activities that create nexus
2. Document presence: Keep records of where employees work and travel
3. Automate tracking: Use technology to monitor sales thresholds
4. Assess regularly: Annual nexus review with SALT advisors
5. Act promptly: Address exposure through voluntary disclosure when possible