If you do business over the Internet, then nexus is a word you must become familiar with. Especially where taxes are concerned.
Nexus is a way of connecting your business to a state or jurisdiction for sales or income taxes. There’s a couple of ways this can happen. First, you could have a physical location in a state. If you’re an online business, that physical location is usually you – i.e., where you live.
Depending on the kind of business you have, that will trigger nexus for both income and sales tax. You’ll have to declare and pay taxes on the income from your business, either on the business return (if you have a C Corporation) or on your personal return (if you have an LLC or S Corporation).
If you sell tangible products to people in your state you could also have sales tax nexus. Depending on the state you’re in, that can extend to intangible products, too. Many states now tax digital products. Some states even tax services, so you have to keep an eye on that, as well.
You can’t escape nexus simply by incorporating a company in another state. Don’t be fooled by people trying to sell you Nevada or Delaware companies with the idea that you can escape paying tax. There are plenty of great reasons to use a NV or DE company – but escaping taxes isn’t one of them.
Economic nexus says that where you make a lot of money, you owe some taxes. Typically the states that have enacted this use 25% – in other words, if 25% or more of your income comes from sales of goods or services to people in that state, you have nexus, either for income tax or sales tax purposes. It can also apply if you have an employee in that state, if you rent a warehouse or a building in that state, or in some cases, if you do nothing at all but advertise in that state.
eTax nexus is something new. It’s aimed squarely at Internet retailers who try and boost sales through affiliate programs. It says that if your company allows affiliates in a state to join your program, put up websites and create affiliate links back to your company, then you have created nexus in that state. Even though you have no physical presence there, if someone buys a product through an affiliate link in the same state as the affiliate, you are obliged to collect and send in sales tax on that purchase.
There are 4 states with eTax legislation already in place: Colorado, New York, North Carolina and Rhode Island. Most large companies have discontinued affiliate relationships in these states, rather than get dragged into state tax issues. But legislation is evolving, and soon, just discontinuing affiliate relationships may not be enough.
We wrote a whole section on nexus in Smart Business Stupid Business. If you can’t avoid it, you’re going to have to plan how to minimize the tax impact on your business. Your best defense is a good offense, but that means understanding the playing field and learning the rules of the game.