NH SBDC wants to bring the issue of nexus to your attention. This blog is not legal advice nor is it tax advice. This is general information for you to use as a starting point for your own research.
What is NEXUS? Nexus generally means a connection between two things. In this case, it is about the connection between your small business and all the states and localities where you do business.
There are two types of nexus: physical presence and economic.
Physical Presence Nexus: If your business has a physical presence in a state, it has a physical presence nexus. Physical presence can be an office in that state, a retail store, a warehouse, a kiosk etc.
If your business has a physical presence nexus you must register and file in that state. Registration is annual and fees vary by state. You allocate income to the state according to state specific rules and you remit income tax to the state.
If sales are taxable, you collect and remit sales tax in that state from the first dollar of sales. If specific sales are exempt from tax, you keep a record of Certificates of Exemption. If sales are not taxable there is no requirement to collect and submit tax.
Economic Nexus: When there is no physical presence nexus in a state, economic nexus needs to be examined.
History: Prior to 2017, it was more straightforward to work with economic nexus. If you shipped products or generated services from the domestic state of record (your home state), there was no economic nexus. However, if you sent service providers into a state, this would create an economic nexus. The Wayfair decision changed the rules, and by 2019, most states established an economic nexus test for sales made into that state, whether the sales occurred as products or in services. Economic nexus rules have continued to evolve since 2019.
There are two basic components to economic nexus: sales and use tax, and income tax.
Sales and use tax. Most states charge sales and use tax on products and often, but not always, on services. Each state established its own formula for triggering sales and use tax, and initially the range was $1 to $500,000 in sales and 1 to 200 transactions in a one-year period. Currently, many states have decided on $100,000 as the trigger point for filing and remitting, and are dropping the number of transactions criterion. This $100,000 amount is a useful rule of thumb for small business owners that need to consider economic nexus.
In addition, there is another component to state sales tax to consider. Although many states collect sales tax only at a state level, there are states that also charge tax on a county level and/or a city level, and this possibility must be checked. There are over 13,000 sales and use tax jurisdictions in the US.
Small business owners that work with non-profit organizations in multiple states should request exemption certificates prior to doing business in states that collect sales tax.
Income tax. A business may have an obligation to collect and remit sales tax, and yet may have no obligation to register in the state and pay income tax. Some states use the same trigger for income tax, while other states use a higher threshold for registration and filing income tax. It is important to check state rules for registering and filing income tax separately from registering, collecting and remitting sales tax.
The NH SBDC will continue to follow this complicated issue and work to find resources to assist small business owners with compliance. You may also need to contact your CPA and/or your attorney. Request SBDC business advising here.
