Is your business liable for taxes in other states?

If you’re doing business in more than one state, you need to know about “nexus.” Nexus is the level of business presence that enables a state to require you to register and collect taxes.

Sales and use taxes

Presently, forty-five states and the District of Columbia have enacted comprehensive sales and use tax laws. While the remaining states have no statewide sales tax, certain local areas within those states can collect sales tax. Although sales taxes generally apply to sales of tangible personal property to end users, states may also tax various services.

In most cases, if you’re a nonresident seller, you can’t be required to collect a state’s sales tax unless you have nexus with that state. Broadly speaking, in this context, nexus is a level of physical presence that’s more than minimal. Depending on state law, physical presence can include owning or leasing real or personal property within the state, or having employees, independent contractors, or agents living in the state or making frequent marketing-related visits.

Once your firm has established nexus according to state law, you must obtain a sales tax permit and collect taxes on sales in the state unless a specific exemption applies.

Other state taxes

Generally, states have applied the physical presence nexus rule only to sales and use taxes. However, states may tax the licensing of intangibles such as trademarks and franchise rights by out-of-state licensors to in-state licensees. States may also assess income or franchise taxes against out-of-state companies that bill royalties and license fees to resident customers for the use of patents, trademarks, and other intellectual property, even though the billing companies have no physical presence.

Nexus issues can be complex and counterintuitive. Please call us if you have questions.
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