Operating across state lines presents tax risks — or possibly rewards

It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Expanding one’s business has become so feasible that many businesses quickly find themselves crossing state lines.

But such a move comes with a risk; operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. At other times, it can produce tax savings.

Do you have “nexus”?

Essentially, creating “nexus” means a business has established a presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus in a specific state depends on that state’s chosen criteria. Depending on the type of tax (sales vs. income), different nexus rules apply for each state. Triggers can vary, but common criteria include:

  • employing workers in the state
  • owning (or, in some cases, even leasing) property there
  • marketing your products or services in the state
  • maintaining a substantial amount of inventory there
  • using a local telephone number

Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there.

Strategic moves

If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting operations in another state — consider conducting a nexus study. The nexus study is a systematic approach to identifying the out-of-state taxes that your business activities may expose you to.

Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is actually lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

The complexity of state tax laws offers both risk and opportunity. Contact KraftCPAs for help ensuring that your business comes out on the winning end of a move across state lines.

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