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Can State Nexus Have a Positive Impact on My Business?

April 4, 2024 5 Min Read Alerts, State and Local Tax Services
Thomas M. Frascella Director, Tax Strategies, State & Local Tax Group Leader

This is part two of a four-part series that provides important information on State Tax Nexus. Part one of this series discussed state tax nexus and the new frontier.

The term “nexus” is often viewed as a negative consequence of doing business, but the reality is that nexus does not always represent a bad thing. Once a business has nexus in a state or states, the real mission is to understand what to do with it. Businesses should not be afraid to understand where they have nexus for state income tax purposes because this gives them the opportunity to use it offensively as a planning strategy to minimize state income taxes or avoid unnecessary sales tax assessments.

The Benefits of Understanding Where Your Business Has Nexus

Understanding where you have nexus and the taxes that your business is subject to  allows you to avoid unnecessary surprises, such as delinquent tax, penalty and interest for non-compliance related to state income, and non-income taxes. Understanding where your business has nexus for sales tax is also critical.

Nexus will allow your business the ability to apportion income outside the borders of your home state where you could use lower tax rates in other states to shelter some of your income from state taxes. Think about a business that has all of its physical operations located in a high tax rate state like New Jersey. If that business can create nexus in another state, it can now apportion its income outside of the state and potentially minimize the taxes that either it or its owners that are non-residents of the state will have to pay. Apportionment is not a right granted to all businesses; it is a privilege. And to enjoy that privilege, a business must have a filing responsibility in another state.

Non-compliance for sales tax could result in shifting the liability for the sales tax from the buyer to the seller in the event the seller’s non-compliance is discovered by the state. Not only is the seller now responsible for paying the sales tax of its customer, but it is also responsible for the associated penalty and interest on the delinquent tax.

Taking a Proactive Approach to Nexus Can Help Mitigate Your Risk

Businesses do not usually worry about nexus until there is an event such as an inquiry from a state or a sale that forces them to confront the ramifications of being non-compliant.

Based on what I see in my practice, state income and non-income tax nexus are key considerations when going through M&A due diligence. Often, the buyer’s advisor is focused on understanding what a business has done to determine where it has nexus. They will almost certainly look to see if the business has conducted a nexus survey and, if not, will make their own determination as to where the business has nexus and for what taxes, putting the business on the defensive to minimize any related exposure from non-compliance.

Having to defend the business’ decision to not file is never a good position to be in during a due diligence exercise. Almost always, the buyer will reach its own conclusions and make its own determination as to the potential liability surrounding the non-compliance, which will include penalties and interest.

Nexus is very sticky. Once you have nexus in a state, it is very difficult to get rid of it.  Businesses should not be afraid to understand where they have nexus for state income tax purposes. Understanding where a business has nexus gives it the power to determine its own future. 

Businesses are free to decide whether they will file in states where they have a responsibility using their own set of criteria. For example, a business may not file an income tax return in a state where it only has minimal exposure and is willing to take the risk. It may not file sales tax returns when all of its sales are non-taxable, as in the case of a wholesaler, and it has proactively obtained proper exemption certificates. As they say, knowledge is power, and knowing where your business has nexus allows it to have the power to mitigate the outcome arising from additional state filing responsibilities.

Stay tuned for part three in our series which will cover additional information on state tax nexus. If you have any questions, please contact your Kreischer Miller relationship professional or any member of our State and Local Tax Group.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.

Contact the Author

Thomas M. Frascella

Thomas M. Frascella

Director, Tax Strategies, State & Local Tax Group Leader

State and Local Tax Services Specialist

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