A company may have to complete many more tax forms than it would like, as well as remit taxes to more government entities, if it can be established that it has nexus within a government’s area of jurisdiction. Consequently, it is very important to understand how nexus is established.
The rules vary by state, but nexus is generally considered to have occurred if a company maintains a facility of any kind within a state, or if it pays the wages of someone within that state. In some locales, the definition is expanded to include the transport of goods to customers within the state on company-owned vehicles (though nexus is not considered to have occurred if the shipment is made by a third-party freight carrier). A more liberal interpretation of the nexus rule is that a company has nexus if it sends sales personnel into the state on sales calls or training personnel there to educate customers, even though they are not permanently based there. To gain a precise understanding of how the nexus rules are interpreted by each state, it is best to contact the department of revenue at each state government.
A recent issue that is still being debated in the courts is that Internet sales may be considered to have occurred within a state if the server used to process orders or store data is kept within that state, even if the server is only rented from an Internet hosting service.
If nexus has been established, a company must file to do business within the state, which requires a small fee and a re-filing once every few years. In addition, it must withhold sales taxes on all sales within the state. This is the most laborious issue related to nexus, since sales taxes may be different for every city and county within each state, necessitating a company to keep track of potentially thousands of different sales tax rates. Also, some states may require the remittance of sales taxes every month, though this can be reduced to as little as once a year if the company predicts that it will have minimal sales taxes to remit, as noted on its initial application for a sales tax license.
Some states or local governments will also subject a company to property or personal property taxes on all assets based within their jurisdictions, which necessitates even more paperwork.
Though the amount of additional taxes paid may not be that great, the key issue related to the nexus concept is that the additional time required to track tax liabilities and file forms with the various governments may very well require additional personnel in the accounting department. This can be a major problem for those organizations in multiple states, and should be a key planning issue when determining the capacity of the accounting department to process tax-related transactions. Some organizations with a number of subsidiaries will avoid a portion of the tax filing work by only accepting the nexus concept for those subsidiaries that are clearly established within each governmental jurisdiction, thereby avoiding the tax filing problems for all other legal entities controlled by the parent corporation.