Why Nexus Matters to Colorado Companies?
In the last few years, state Departments of Revenue have steadily increased their review, assessment and collection efforts of outstanding sales, use, franchise and other tax liabilities.
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The seemingly endless parade of tax regulation changes has made it more difficult for management to keep pace with their compliance obligations. Unfortunately, this creates an opportunity for states to create additional revenue through penalties and other fines. Companies with operations in more than one state are often familiar with the term nexus, what it means, and closely monitor its impact on tax planning and compliance. However, others may be familiar with the term and impact on the company. Regardless of company size it’s important to become familiar with nexus, how it’s determined and the potential impact on planning efforts. To help clients, prospects and others become familiar with nexus and how it is determined, Hanson & Co has provided a summary of key information below.
Nexus is a legal term used to describe the amount and degree of a taxpayer’s business activity that must occur within a state before they become subject to state income, sales, franchise or other tax types.
How is Nexus Established?
Nexus can be established in a variety of ways. Some are more common sense than others, but all of them result in an additional tax liability for a company. While the rules vary by state, the general criteria by which nexus can be created include: having inventory, leased property or employees in a state, accepting or soliciting orders from another state (speaks to online or “Amazon” nexus), and the use of a web hosting server or sharing space on a third party server in another state.
Types of Nexus Classifications
Physical Nexus – This occurs when a company has a temporary or permanent physical presence in a state, which may include physical inventory and a warehouse, equipment, offices or employees located within the state. Temporary presence can result from traveling employees visiting a state to meet with customers or prospects, attend tradeshows or even where inventory is consigned in warehouses.
Click-Through Nexus – This occurs when a company meets a minimum sales amount resulting from referrals made by an in-state affiliate (Amazon, Overstock.com, etc.). Note that these affiliates are not employees or independent contractors of the company. This means that an online retailer could have a nexus responsibility in multiple states depending on where affiliates are allowed to be based. Currently there are more than 20 states that have a click-through nexus law in effect.
Economic Nexus – This occurs when a company passes a “presence test,” which generally involves assessing property, payroll or sales within a state. In certain circumstances it can be a combination of the three. Currently there are over 40 states that have an economic nexus test for outside companies.
The last thing a business owner or manager wants to face is a letter from a state Department of Revenue informing them of an unexpected nexus liability. Once the letter is received it’s too late to take proactive planning or action steps. If you’re company is interested in conducting a nexus review or has questions about state income, sales, franchise or other taxes, Hanson & Co is here to help. For additional information please contact us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.