09 May Operating Across State Lines Presents Tax Risks — or Possibly Rewards
It is a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.
However, therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. However, sometimes it can produce tax savings.
Do you have “Nexus”?
Essentially, “nexus” means a business presence in a given state that is substantial enough to trigger that state’s tax rules and obligations.
Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:
- Employing workers in the state
- Owning (or, in some cases even leasing) property there
- Marketing your products or services in the state
- Maintaining a substantial amount of inventory there
- Using a local telephone number
Then again, one generally cannot say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably will not create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably would not be taxed in that state. On the other hand, let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she does not close any sales, and you have no other activity in the state, you likely will not have nexus.
If your company already operates in another state and you are unsure of your tax liabilities there — or if you are thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.
Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you do not already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.
The complexity of state tax laws offers both risk and opportunity. Contact us for help ensuring your business comes out on the winning end of a move across state lines.