How to Avoid Nexus: A Guide for Businesses

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How do you avoid nexus?
When physical presence was the only way to establish a sales tax obligation, it was possible to manage nexus by limiting your physical footprint through a variety of means, such as: Avoid making deliveries into other states. Avoid traveling across state lines for business. Avoid storing inventory for sale in other
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You may be familiar with the concept of “nexus” in regard to state taxes if you own a business. Nexus is a relationship with or presence in a state that results in a tax liability. For instance, you might have nexus and be required to register and pay taxes if you have a physical location, workers, or sales in a state. There are steps you may take to avoid nexus and maintain compliance, even though this can be a difficult and confusing issue for many organizations.

Does the term “Nexus” apply to all taxes equally?

Numerous distinct state taxes, such as sales tax, income tax, and franchise tax, are covered by the notion of nexus. However, depending on the tax type and the state in question, the particular guidelines and thresholds for nexus can change. For instance, some jurisdictions have economic nexus regulations that only apply to sales tax if you reach a particular threshold for sales or transactions there, and other states have physical presence nexus requirements that demand you have a physical location or workers there.

Does Economic Nexus Apply to Income Tax, then?

Laws governing economic connection can be applied to both income tax and sales tax. In fact, in reaction to the Supreme Court’s ruling in South Dakota v. Wayfair, which affirmed South Dakota’s economic nexus statute for sales tax, numerous states have lately passed economic nexus laws for income tax. This implies that you may have income tax nexus and be obligated to file and pay taxes in that state if you reach the sales or transaction level there.

How Do States Handle the Sales Tax Nexus Issue of Physical Presence?

Although the physical presence requirement for sales tax nexus has long been in effect, the digital era has made it more complicated. While some states have implemented economic nexus laws that completely exclude physical presence, others have enacted legislation that widen the concept of physical presence to encompass practices like affiliate marketing or drop-shipping. To maintain compliance with sales tax nexus requirements, it’s crucial to stay current on developments in each state where you conduct business.

Advice on How to Avoid Nexus

Limiting your activities in a state as much as you can is the best method to avoid nexus. The following advice may be helpful:

– Unless it is absolutely necessary, avoid having a physical location, staff members, or inventory in a state.

– To prevent physical presence, use third-party partners for fulfillment, warehousing, and other services.

– Keep track of your purchases and sales in each state to make sure you don’t go over the economic nexus limit.

– To evaluate your nexus requirements and create a compliance strategy, speak with a tax expert or lawyer.

Nexus is a complicated topic that can have major tax repercussions for corporations, to sum up. You can prevent nexus and comply with state tax laws by being aware of the requirements and taking measures to limit your activity in each state.