All the states, with a few exceptions, impose some kind of annual privilege tax. In most states it takes the form of an income or franchise tax based on net income. Some states impose a gross receipts tax, while other states impose a hybrid that may include several factors. With more businesses involved in interstate commerce and selling to customers not just across town, but also across the country, there is an increased likelihood of filing requirements in more and more states and localities. The states are also getting more aggressive in finding non-filers doing business in their states. A “Nexus Study” is designed to identify whether a company has tax filing requirements in states where the company is engaged in a business activity.
“Nexus” is that minimum level of business activity or connection with a state, which will result in your business being subject to taxation. This varies greatly by state and tax type. Determining if a business is required to file tax returns in a particular state requires a comprehensive understanding of the business plus federal and state laws, and relevant court cases.
Control Your Exposure
Awareness and control is the objective of a nexus study. Depending on the business structure and the activities involved, it may be desirable or undesirable to create nexus in a particular state.
A company may want to create nexus in a state in order to export tax base to the target state, where there may be no tax or the tax base is taxed at a lower rate. Simple things such as information on a salesperson’s business card, telephone listings, how mail is addressed to a salesperson or where a salesperson meets customers can have a significant impact on creation of nexus for net income tax in a state.
Nexus avoidance is often the primary tax planning strategy of some businesses. Nexus should be avoided, if possible, in high tax rate states. However, management may want to avoid nexus just to reduce the administrative burden of filing tax returns. If nexus avoidance is the objective in a state, nexus creating activities that have limited benefit to the business can be identified and altered to reduce the risk of creating nexus.
Most businesses are not filing tax returns in the proper states; some file in too many, some file in too few, and some are filing in the wrong states.
Failing to file can lead to substantial tax liabilities and penalties. Filing in too many states is costly as well. A GWI Nexus Study will determine where your business is required to file. It will also provide a risk assessment by state which provides information necessary for you to make a business decision about where to file.
Contact us now for your Nexus Study.