KPM

Bartering Without Cash Transactions Spouse Travel Expenses Tax Efficiency Starting A Business As A Sole Proprietor Employee Retention Tax Credit Emergency Savings Accounts QSBC Advantage Green Tax Reform Employees Receive Tips Selling Commercial Or Investment Real Estate Standard Business Mileage Rate EV Reporting Requirements Section 174 Tax Calendar Tax Breaks Company Vehicle Benefits Tax Strategies for Financial Success 2023 Tax Bill 2024 Inflation-Adjusted Tax Parameters For Small Businesses Cost Segregation Study Business Entity Per Diem Business Travel Rates Social Security Wage Base Tax Depreciation Rules Work Business Expense Deductions Deadline TAx Tax issues Depreciating Business Assets Loan Guarantees LLC Tax-Saving S corporation Handling Expenses On Your Tax Return

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.

Strategic Moves

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.

Related Articles

Talk with the pros

Our CPAs and advisors are a great resource if you’re ready to learn even more.