Nexus FAQs for Accountants and CPAs

As you work with business clients who sell their products and services over state lines, “nexus” is a little term with big implications. Recently, Milton Turcios, CorpNet’s VP of operations, hosted a Facebook Live event featuring Elisa Reyes, principal and CPA at the accounting firm HCVT, that addressed the topic of nexus.

Below, we’ve assembled a list of helpful FAQs, inspired by the live event, to give you a go-to resource for answers to some of the questions you and your clients may have about nexus and how it affects a business’s tax responsibilities. For even more insight, I encourage you to watch and listen to the live event recording so you can benefit from all of the useful details Elisa shared with our viewers.

1. What does nexus mean?

In general, it means there’s a connection between a business and a state. If sufficient connection exists, the state can require an out-of-state business to register as an entity, pay taxes and file returns, and submit other filings in the state. States’ rules vary for determining what amount of business activity in the state is sufficient enough to establish a nexus.

2. Which kinds of tax obligations does nexus impact?

The concept of nexus can apply to various types of taxes, including income tax, sales tax, franchise tax, capital tax, and gross receipts tax. Each state determines its own threshold for when a business is responsible for taxes, and the thresholds for specific taxes also vary.

3. Are there different types of connections that constitute nexus?

Yes. They include physical nexus, economic nexus, and affiliate nexus.

4. What is physical nexus?

Historically, the standard for nexus has been a physical presence in a state. Physical nexus is the standard by which a state may enforce a filing requirement because a business’s activities physically take place in the state.

Examples of when physical nexus occurs include:

• The business has an office location, a warehouse, or inventory in the state.
• The business has physical assets (such as property or equipment) in the state.
• The business has employees or independent contractors in the state working on behalf of the company.

5. Does physical nexus apply if the company has workers in a state only on a temporary basis?

This gets tricky! Say a company doesn’t have a permanent employee in the state but sends a representative to work there for a few weeks. Is that considered a physical nexus? It depends. States have varying rules for whether a worker’s stay is long enough to trigger registration and tax filing responsibility. For example, Hawaii draws the line at 60 days, while some states say just 14 days is enough to establish a nexus.

6. What is economic nexus?

Economic nexus is based on an economic presence rather than a physical presence. We typically think of economic nexus primarily in the context of remote sellers (a.k.a. out-of-state businesses selling their products and services in another state where they are not registered as a business entity).

Whether a business is considered to have an economic presence generally depends on whether it sells its products or services to customers in the state and if it has reached a certain threshold in sales or income from those customers. If a company meets the criteria for having economic nexus, it is responsible for business filings and paying certain taxes in the state.

7. What are the economic nexus thresholds, and how do they impact sales and income tax responsibilities?

Nearly all states define a “bright-line” (a.k.a. factor-based) presence test for economic nexus to determine a company’s tax responsibilities. Thresholds vary from state to state and differ depending on the type of tax. For example, some states say that if an out-of-state company generates over $100,000 in sales or has 200 separate sales transactions with customers in the state, an economic nexus is established and the company must collect and remit sales tax.

Only a handful of states define a bright-line threshold for when a company is subject to paying and reporting state income tax (e.g., Alabama has set its threshold at $500,000). That lack of standards can make it difficult for remote sellers to know whether they must pay income tax in states outside of their home state, and getting a tax professional’s guidance can help cut through the shades of gray.

8. What is affiliate nexus?

This is when an out-of-state seller establishes a nexus by having an affiliate company or representative with a physical presence in a state. Most states now have affiliate nexus laws that give the state the authority to tax remote sellers if they have an affiliate operating there. Affiliate nexus laws vary by state.

9. What are some state-specific nexus rules to help me better understand how the thresholds differ from state to state and for the different types of taxes ?

• Colorado: The economic nexus threshold is $500,000 in sales for a company to be obligated to report and pay income tax, while the threshold for sales tax is $100,000.
• California: If a company has over $71,000 in payroll in the state, it is subject to California’s filing obligations. This applies to both in-state and out-of-state businesses. So, a company with a physical presence in California won’t have a filing obligation if its payroll is below the $71,000 threshold. (Note that California changes its threshold every year for inflation.)

10. Where can I find a state’s nexus rules?

Several resources include:

• The state’s website – Some have publications centered on nexus and doing business in the state as a remote seller.
• The state’s tax forms – Usually, their instructions cover who is subject to the specific tax, including the thresholds that apply.
• CorpNet’s State-by-State Guide to Economic Nexus – This blog post covers nexus rules for remote sellers, marketplace facilitators, and marketplace sellers in each state. It also provides information about state payroll taxes.
• The Sales Tax Institute Economic Nexus State by State Chart – This resource lists the thresholds in each state, registration deadlines after reaching thresholds, and other details.
• A tax or legal professional with nexus expertise – Nexus can get complicated, so consulting with someone who has extensive knowledge and experience can help ensure you provide accurate information to your clients.

11. What is Public Law 86-272, and how does that affect state income tax filing requirements, particularly for businesses that sell tangible personal property?

Public Law 86-272 is a federal law that prevents a state from imposing an income tax on companies that only have a sales presence in the state. The legislation is favorable for companies that have sales representatives selling their tangible personal property in a state but without a physical presence otherwise. By traditional nexus standards, having a sales representative in the state would constitute physical nexus and require the company to pay income tax. But this law exempts businesses that sell tangible property from state income tax if they have sales representatives in the state but have not established physical nexus otherwise (such as having an office or warehouse there).

Public Law 86-272 overrides state economic nexus rules for income tax. Realize that it does not exempt companies from state sales tax and other applicable taxes.

Companies must also be careful about what responsibilities they give their sales representatives because not all business activities sales reps are known to perform are protected by the law. For example, if a salesperson not only sells but also approves orders, provides technical assistance, or repairs products within the state, the law does not apply, and the company is subject to the state’s economic nexus rules for income tax.

For more information, check out the Multi-State Tax Commission’s (MTC) detailed guidance on the legislation.

12. If a business has employees working remotely in a state who are not doing sales but performing other work for the company, does that create an income tax return filing requirement?

Generally, if a business has employees working in a state, it will have an income tax filing obligation there because it has established a physical nexus.

However, there are some exceptions. For instance, if the state is one of the six with a payroll factor threshold and the business’s payroll falls under that threshold, it may be exempt from state income tax. Often, those thresholds are pretty low (e.g., $50,000 of payroll), so it doesn’t take much to surpass them.

13. What information should I ask my business clients to provide so that I can help them determine if they have nexus in a state?

The questions below will serve as a good starting point:

• Where does their company have offices, warehouses, storefronts, etc.?
• Where do they have employees and independent contractors?
• What activities do their employees or representatives perform on behalf of their company?
• In which states do they sell their products and services?
• In which states do they have customers?
• How much sales and income do they generate in each state?
• How many sales transactions do they have in each state?

14. Should a business collect sales taxes even if they have not reached the state’s economic threshold for sales tax?

A company may collect and remit sales tax even if it’s under a state’s economic threshold. There’s no penalty for doing so. However, make sure they realize that if they’re under the threshold and collect sales tax from their customers, that money doesn’t belong to them. They must report and remit it to the state if they collect it.

Generally, most companies track their sales and wait to collect and remit sales tax until they get close to the state’s threshold.

15. Is the concept of nexus only applicable in the United States?

No, it is not just a state concept. It’s also an international tax concept. If a company’s business activities meet the definition of having a nexus in a country, the company must fulfill the required registrations and tax filings in that country.