Nexus is a legal term that establishes a business's connection to a state, which can trigger tax obligations.
This can include sales tax, income tax, and other types of taxes based on business activities within the state.
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Having an employee present in a state, even for a brief period, can create nexus.
For instance, Arizona law states that an employee working there for more than two days a year establishes nexus.
The concept of nexus is often influenced by "physical presence" laws, meaning that simple activities, such as having a single employee working in the state, can lead to tax obligations even without selling goods in that state.
In some states, the presence of a remote employee due to the COVID-19 pandemic has led to temporary nexus waivers, clarifying that such presence would not create nexus for certain taxes during the health emergency.
States vary widely in defining what creates nexus.
For some, having an employee is enough; for others, additional criteria may include maintaining property or deriving revenue from the state market.
Employees working remotely can trigger income tax nexus.
If an employee performs services in a state, that typically creates a requirement for the company to comply with that state's tax laws.
Independent contractors can also create nexus.
If a contractor is performing significant services within a state, similar tax obligations can arise just as if they were an employee.
Some states impose a gross receipts tax, which can apply even without a typical sales tax framework.
For example, Delaware does not have a sales tax but requires an annual business license and has a gross receipts tax.
The Supreme Court's ruling in *South Dakota v.
Wayfair, Inc.* expanded the definition of nexus, confirming that states can require businesses to collect sales tax based on economic presence, not just physical presence.
Nexus rules can be complex because there's no uniform standard across states.
Businesses often need to evaluate their unique circumstances against specific state laws to determine whether they have nexus.
During the pandemic, many businesses had to navigate changing regulations concerning nexus, which blurred lines about employee presence and created confusion around temporary allowances and exemptions.
States like South Carolina have outlined that telecommuting during the pandemic does not create nexus.
However, such temporary rules might differ post-pandemic, so ongoing assessment is required for compliance.
Filing requirements vary based on employee activities in the state.
If an employee's work goes beyond mere sales solicitation, it could impose a filing requirement in the state in which they reside.
Nexus can extend to intangible activities, such as maintaining a website that targets customers in a specific state, even if there are no employees or physical presence there.
The interplay of state laws means businesses may need to conduct nexus studies regularly to stay compliant, especially as remote work dynamics evolve.
Companies often use nexus questionnaires provided by state tax authorities to assess their nexus status and ensure that they've identified all potential tax obligations.
Businesses may find themselves facing unanticipated tax liabilities in states where they believed they did not have nexus, potentially resulting in costly audits or penalties.
Some states exempt certain types of remote employees or activities from establishing nexus, but these exemptions can be temporary and subject to change without much notice.
The use of technology has changed how companies operate, making it easier to hire remote employees, which adds complexity to nexus laws as more companies become multi-state employers.
As remote work continues to be a significant trend, states are adapting their tax laws, leading to new legal precedents that could redefine what nexus means for businesses in the future.