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Tax Implications of Operating in Multiple States (Nexus)

12.16.22

In the ever-changing environment of state income, franchise and sales tax, being proactive is the best way to stay in compliance and avoid penalties. Companies should review state income, franchise and sales tax nexus obligations on an annual basis at a minimum.

Many states are adopting bright-line tests for economic nexus after the Wayfair case ruling, and you may find your company having nexus based on newly adopted rules. The impact of the Wayfair U.S. Supreme Court case has been substantial. It established the connection (nexus) between a remote vendor and a taxing state, which allows the state to increase sales tax revenue by increasing collections, as sellers must collect sales tax from customers within the taxing state and pay it to the state, register with the state and/or provide customers’ sales dates to the state. Some states have also established bright-line tests for gross receipts, payroll and property for the imposition of income and minimum franchise taxes. Several states apply a $100,000 annual gross receipts requirement, while New York State currently has the highest bright-line test for gross receipts of $1,000,000.

There is constant change happening in tax legislation and just because you did not have nexus in a prior year, does not necessarily mean you do not have it currently. Companies should identify and prioritize based on risk and exposure and also make sure they are registered in applicable states. Often, it is not enough to just file tax returns without also being registered.

Many states offer voluntary disclosure and compliance programs to pay any back taxes owed, as opposed to being caught in the future for failure to comply. The benefits of these programs include the ability for taxpayers to pay any tax due in installments, penalties oftentimes are forgiven, businesses may be protected from tax liens and, perhaps, most importantly, lookback periods may be limited.

States also have nexus questionnaires which are forms produced by states that are sent to businesses not currently filing income tax, franchise tax and/or sales tax returns to obtain information concerning the out-of-state company’s business activities and to determine whether those activities subject the company to nexus.  These are often sent directly to the company, not to their tax preparers. They may appear harmless but can often have major tax implications.

For further information or if you have questions about how these changes will impact your tax liability, feel free to contact Alex Nitka, CPA, at anitka@dmcpas.com or any of our tax professionals at 315-472-9127.

Contributing author: Alex J. Nitka, CPA is a tax partner at Dannible & McKee, LLP.  Alex has over 14 years of experience in all areas of income taxation, including individual and corporate tax planning, financial planning, multi-state taxation, research and development, New York State income tax credits and ownership transition issues.