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Stable Rock

04/10/2024

Key Takeaways

  • Know Where You Owe: Nexus is created when your business has sufficient activity in a state, which can trigger tax, wage, and legal responsibilities in that jurisdiction.
  • Remote Work Can Complicate Compliance: Hiring remote employees may create tax and payroll obligations in their home states, and some may be subject to double taxation depending on evolving state rules.
  • Strategic Growth Requires Tax Clarity: As your business expands across state lines or builds affiliate networks, understanding and managing nexus is critical to staying compliant and avoiding unexpected tax liabilities.

Whether you own or manage an existing business or are creating a new startup, it’s critical to understand the concept of nexus and how it applies to your organization. Nexus describes a company’s connection to a jurisdiction for the purpose of determining its tax and other legal obligations, such as unemployment, wage and hour, and workers’ compensation requirements. In this article, we’ll explore the concept of nexus and the range of impacts it has on businesses.

What creates a nexus?

A nexus is created when a company conducts sufficient business activity within a state or other tax jurisdiction. This can include employing workers and/or selling goods or services within its boundaries. Before the rise of remote work and online commerce, determining where a company had nexuses was relatively simple and was typically limited to places where it maintained a physical presence.

Sales

The old mail-order companies didn’t have to collect sales taxes in states where they lacked a physical presence beyond package delivery. However, the increasing prevalence of remote sales sparked change. The 2018 Supreme Court decision in South Dakota v. Wayfair granted states new authority to collect sales taxes on remote transactions, regardless of whether sellers maintained a physical presence. States that have a sales tax typically have a threshold dollar amount that creates a nexus for sales tax purposes.

Employment

Businesses that employ remote workers must comply with payroll tax obligations within their employees’ home states. Additionally, some of these employees may be obligated to pay taxes in both their home states and those of their employers. While traditionally, remote workers have been responsible for income tax only in their home state, some states have been implementing the convenience of the employer rule, which obligates out-of-state employees to pay taxes in the employer’s state in certain circumstances.

Some states allow remote employees to avoid this double taxation by claiming a credit to offset income taxes paid in another state. However, this results in loss of revenue for remote workers’ home states. As a result, several states have mounted which may bring this rule to an end in the near future. In the meantime, however, employers should be aware of the significant impact this rule can have on their remote workers.

Affiliation

A nexus can also be created through affiliation with an out-of-state company that refers business in exchange for a commission or fee. Often, this type of nexus arises via affiliate links to the company’s site, also known as a “click-through nexus.” As with sales tax, states typically specify a minimum threshold amount of referral sales that create an affiliate nexus.

Why is it important to understand nexus?

The nature and operations of a business can determine the complexity of its nexus network. As a result, developing a firm understanding of this concept is critical for ensuring compliance with all applicable tax laws, effectively managing risk, and making informed strategic decisions.

Because state laws vary and are subject to change, it can be extremely challenging for business owners and managers to fully understand the impacts of their company’s cross-jurisdictional activities. As a result, it’s critical for organizations with many varied interstate business relationships as well as those considering expansion, remote hiring, or relocation to work closely with an experienced tax advisor who can clarify their tax obligations and provide them with strategic advice.

Trusted Tax Advice for Startups & Enterprises

Stable Rock works with startups and enterprises across a wide variety of industries. Our tax professionals are experienced at advising businesses with connections spanning multiple states. You can trust us to help ensure your compliance with all applicable tax laws as well as optimize your organization’s tax efficiency. Learn more about our firm or subscribe to our newsletter for regular updates on our latest tax articles.