Question

A company would most likely establish nexus with a state for state income tax purposes if it

• sells tangible property within the state.

• hires employees in the state to solicit sales.

• purchases raw materials from a supplier within the state.

• buys an office building in the state to conduct business.

Answer 1

A nexus is a relationship or connection between two or more entities. In tax law, it's a relationship between a taxing authority, such as a state, and a business. A nexus must exist before a taxing authority can impose a tax on the enterprise, and it requires that there be a substantial link between the jurisdiction and the business. The concept of a nexus has become a complicated issue with the advent of online sales businesses that serve numerous states and countries.

The term "nexus" is used in tax law to describe a situation in which a business has a tax presence in a particular state. A nexus is basically a connection between the taxing authority and an entity that must collect or pay the tax. Two clauses of the U.S. Constitution form the origin of a tax nexus:-

• The due process clause, which requires a connection
• The commerce clause, which "requires substantial presence"

Although the definition of nexus can vary by jurisdiction, it generally requires that a business must commit to a certain type of action in the jurisdiction. Joe's Widgets might be considered to have a nexus in Nebraska if Joe maintains an office there, if he employs workers there, or if he even stores his widgets in a warehouse there.

Nexus for Income Tax Purposes:

Nexus is typically created for income tax purposes if an entity derives income from sources within the state, owns or leases property there, has employees there who are engaged in activities that exceed "mere solicitation," or has capital assets or property located there.

Nexus for Sales Tax Purposes:

Nexus is determined more loosely for sales tax purposes. A business might have sales tax nexus in a state because:

• It has a physical location in the state.
• It has resident employees working in the state.
• It has property, including intangible property, within the state.
• It has employees who regularly solicit business there, such as salespeople.

Conclusion:

Why is the determination of nexus so important and the cornerstone of state tax concepts? Because, once you are deemed to have created nexus, then you are subject to a state’s tax laws. For sales tax, that can mean collecting and remitting taxes from customers (and filing returns). For income tax it means apportioning income to a state, filing returns and paying applicable state income taxes. As noted above, there are other taxes that can be tripped by having nexus as well.