In today's business environment, companies are looking to expand and grow into new markets, and the information age is providing the opportunity to deliver products and services to multiple states and countries, quickly and cost effectively. But with market expansion comes tax ramifications that business owners may not be factoring into their plans.
Nexus is a connection or link associating two or more people or things. Businesses and sales, businesses and employees, businesses and contractors, individuals and investments: any of these could be a nexus creating relationship. State tax jurisdictions are working hard to identify these relationships, thereby tying your business to that state. The result could be increased tax filing and payment responsibilities for you and your business.
Some of the common activities that can cause nexus with another taxing jurisdiction (besides your home state) include:
Physical presence in a state (ie. office, warehouse or retail location);
Deriving income from sources within a state;
Owning or leasing property in the state;
Employing personnel within a state who engage in activities that go beyond those protected under federal interstate commerce laws;
Delivering products to customers in Company owned vehicles;
Advertising in local media;
Sending employees into the state to attend trade shows or conduct training seminars;
Actively soliciting orders for sales of tangible personal property through employees or agents;
Performing activities including solicitation of orders for services, real estate or intangibles;
Allowing unrelated third parties with an in-state physical presence to receive payments on the Company's behalf;
Selling products or services over the internet.
Any of these relationships could result in the need to file sales tax, property tax, income tax and/or franchise tax returns within the other state. The relationship your business has with another state could require a completely different set of filings than required with your home state or any other state.
Are you doing your due diligence when you consider expanding your business? Is it time to evaluate the business you are currently conducting? There are several key questions you should be asking yourself before you expand into a new location.
Over the past few years, states strapped for funds (and which state isn’t) are working hard to uncover these relationships that will require businesses to file income tax returns, sales tax returns, property tax returns, or any other sort of information return or license in their state to generate income. States are beginning to cross-check their systems (income tax filings compared to sales tax filings, secretary of state registrations to sales tax filings, etc.) to determine if an entity is registered with one taxing jurisdiction and not with another, or filing returns with one but not all required offices within the state. From here, states have been sending nexus questionnaires, and in some cases, automatically generating non-filing notices assessing tax, penalty and interest, sometimes for multiple years.
If you receive one of these state notices, don’t ignore it! The notice should be forwarded onto your tax preparer or accountant to address. At times, the notice will assess an estimated amount of tax, along with the related penalties and interest. The amount due to the state may be less than what was estimated on the notice, so the balance due may be less if a return is prepared and sent to the state, rather than paying the estimated amount. And in some cases, completion of the nexus questionnaire will show the state that nexus does not exist.
Each partner or member in a limited liability company, partnership or S-corporation is taxed on their allocated share of income at the individual level, so they may also be subject to income tax in the states that these entities report income. The K-1 generated by these business entities should include state reporting for all jurisdictions where the individual is required to file. And since the states are made aware of this filing requirement through the entity’s state tax filing, it probably won’t be long before they come looking for individuals not filing in all jurisdictions where their companies do business.
While we all see expansion as a key opportunity to grow, there are times when it may cost more than the profit earned, due to minimum taxes, fees, license requirements and the consultation and tax compliance assistance needed. Please feel free to contact your ECS representative to determine if you are liable for additional taxes, fees or other registrations, we are happy to help guide you through this process.
2014 Tax Due Dates:
July 31st –
2nd quarter 2014 employer payroll tax returns due
August 31st –
Monthly Illinois wage report for July due (employers with 25 or more employees)