Operating business in another state could possibly mean being subject to taxation in that state. This liability, in some cases, can inhibit profitability, and it can sometimes produce tax savings.

With the ease and popularity of e-commerce, as well as the impressive efficiency of many supply chains, companies of all sizes are finding it easier than ever to widen their markets. It has become much more feasible to do so as many businesses quickly find themselves crossing state lines.

Does Your Business have “Nexus”?
Having “nexus” essentially means business presence in a given state that is substantial enough to trigger that state’s tax rules and obligations.
What business nexus activates in a given state depends on the 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, business nexus doesn’t have a certain “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there.

For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have business nexus.

Strategic Moves for Out-of-State Businesses
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a business nexus study. This is a systematic approach to identifying out-of-state taxes your business activities may expose you.

However, the results of a business 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 don’t already have it). 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 a Barnes Wendling advisor for help ensuring your business comes out on the winning end of a move across state lines.