Last week we talked about how individuals need to report income no matter where it is earned. This week I want to talk about requirements that businesses have to report income when they do business in multiple states. This is referred to as Nexus and we have talked about this before in the sales tax context, but today I want to talk about this in the income tax context
Let’s go back to the sales tax Nexus since I remember us talking about it. That had to do with a supreme court case right?
- Yes, that was the Wayfair case from 2018.
- The US Supreme Court ruled that states could impose economic nexus.
- This nexus is based on volume of sales into a state.
- It did not matter if you had any other connection to that state, if you shipped a certain dollar amount (normally $100k or more) or had a certain number of transactions in the state (normally 200, you as a business needed to charge your customer sales tax if the sale was taxable.
- Each state has different thresholds.
How is income tax nexus different?
- In order to have income tax nexus in a state, you must have a connection above and beyond just shipping product to a state. This is higher threshold.
- This is a result of a 1992 US Supreme Court case – Quill
What is the higher threshold?
- The US Supreme Court said-
- A business needed to have a physical location or presence in a state
- They needed to have employees in the state that can make contracts with customers. Or if they have employees that make regular trips to the state.
- A company would need to have inventory in the state
- Deliver product into the state with their own trucks (not common carrier)
- If a company has any of these, the may be a strong case that they have nexus
What happens once a company has nexus?
- They have to file an income tax return in that state and pay taxes to that state.
How do they know how much income is earned in the state?
- Most states use sales as the determining factor. It’s called apportionment.
- If they have 10% of their sales in another state, then they report 10% of their income to that state.
- Although most states use the sales apportionment, others use payroll, inventory or assets in the state as factors.
- Wisconsin and Minnesota use sales as the only factor.
Just like we talked about last week, are the sales taxed in both states?
- In most cases no. Like for an individual-
-
- There is a credit available in your home state to offset the tax paid in the other state.
- Or for corporations, they only pay tax on their home state income – not other state income.
- Overall, they generally pay the same amount of tax, it is just spread over multiple states.
What if a company is not paying taxes to a state but they should be?
- States are getting better at finding companies doing work in their states.
- Normally a state has a three to four year statute of limitation, but if the company does not file in a state when they should have, the statute never starts to run.
- State can go back to the beginning to assess tax and assess interest and penalties.
Be sure to talk to a tax professional if you have any questions about the Business Nexus or would like further assistance.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
