Entrepreneurs are always looking for ways to expand their businesses. Some attempts are successful and yield results. Others are what are best referred to as learning opportunities. In some cases, the two can overlap. One example involves expanding a business into another state.
This expansion can happen in any number of ways. Perhaps the business is now selling the product in a different state or looking for workers from that area. The expansion could result in a larger customer base, but there may be a catch.
Did this expansion just create a nexus?
What is a nexus? A nexus is a legal term that refers to a business’ presence within a state. If a nexus is established, the business may have tax obligations to that state.
When is a nexus established? Unfortunately, there is no easy answer to this question. Federal law requires that this presence be “substantial” in order for the nexus to occur. However, the Journal of Accountancy notes that the term “substantial” is not always easy to define.
Although there are not always clear rules, as noted in a recent piece in Accounting Today, there are a few “rules of thumb.” Here are two:
- Property or capital. If a business has an office in a state, a nexus is most likely present.
- Employees. When workers are present in a state, a nexus is likely.
In some cases, having sales in a state is enough to establish tax obligations in that state. Examples would include sales tax and possible income tax liability.
Where can business owners find guidance on these rules? Business leaders who are attempting to navigate these issues are wise to seek legal counsel. An experienced attorney can review your situation and help determine if a nexus is present. If so, your legal counsel can also provide guidance on how the nexus impacts your business.