Nexus varies state by state but, generally speaking, the contacts required to generate taxes can be fairly minimal. Furthermore, the term "physical presence" is often misunderstood and can lead to unwanted surprises, including penalties. Other key focus areas include remote employees, and new sourcing rules among others.
What is nexus?
Nexus is really just a fancy word for the minimal contacts that you need to be able to be subject to tax in a specific state. So if you have Nexus in a state you're subject to that state's taxing provisions whether it's income tax, sales tax, etc. Nexus does vary state by state as well as tax by tax. Although there's a lot of differences between the taxes and between the states as to what may constitute a nexus the one thing that's certain is that it's a very low threshold for the contacts that are required.
What does physical presence mean?
Physical presence is probably the most misunderstood term in state taxation overall. Most people think of physical presence as I need bricks and mortar or I need an office building or a factory of some sort in a state in order to have physical presence and have Nexus when almost the exact opposite is true. While yes you do need some sort of “physical presence”, that physical presence is very minimal as far as you can have physical presence through third parties, through agents or affiliates. You can also have physical presence in a state through intangibles. So even just having a person walk through state soliciting sales may give you physical presence, or just licensing an intangible in a state to somebody else who uses it in the state may give you a physical presence. So once you can have physical presence through third parties or through intangibles. I think the term is so watered down that it doesn't really have a whole lot of meaning.
Apportionment issues present challenges and opportunities. Proper planning can help to manage your overall tax liabilities, and knowledge of these issues can help mitigate potential exposures and combat aggressive taxing authorities on audit.
In this Apportionment overview, Gary Bingel discusses challenges and opportunities and how planning can help manage overall tax liabilities, and knowledge can help mitigate potential exposures and combat aggressive taxing authorities on audit.
Apportionment is the manner in which income is divided between various taxing jurisdictions. A number of states have moved to receipts receiving more emphasis. Our video overview sets the stage for our pitfalls, risks and opportunities discussions.
Defensively, your tax team wants to avoid pitfalls associated with nexus. On the other hand, understanding nexus can open the door for opportunities such as Voluntary Disclosure Agreements or amnesty.
A major nexus pitfall includes unpaid taxes, uncollected sales tax and flow-through entity issues are sometimes missed. Avoiding sticky situations requires an understanding of what creates nexus for different taxes, and in different jurisdictions.