Nexus

Nexus is a link between a business and the territory governed by a taxing authority. Whenever nexus can be established, the company must  charge customers for taxes related to that taxing authority and remit the collected taxes to the taxing entity. Given the multitude of taxing entities in the world, it makes sense to minimize nexus, thereby reducing the number of tax remittance and reporting obligations of the business.

Nexus is considered to have been established if either of the following conditions can be proven:

  • A company maintains a facility of any type within the borders of the taxing authority
  • A company pays the wages of an employee located within the borders of the taxing authority

Some taxing authorities have expanded the definition of nexus in order to generate more tax revenue. Their view includes the preceding items, plus the following ones:

  • A company uses its own vehicles to transport goods inside of the borders of the taxing authority
  • A company sends its employees into the borders of the taxing authority in order to make sales calls, conduct training, and so forth, despite not being based within the region
  • A company sells data from a server that is physically located within the borders of the taxing authority (even if the server is owned by a third party)

Given these differences, it is best to contact the local state government for the applicable rules regarding nexus.

Tax Remittances Required Under Nexus

If nexus exists, a company must take the following steps:

  1. File with the local state government to do business within the state, which requires a small annual filing fee
  2. Apply for a state sales tax license
  3. Withhold sales taxes on all sales made within the region
  4. Remit the sales taxes to the applicable government entity
  5. Pay personal property taxes on any assets located within the region

Nexus Avoidance

The main effect of nexus is that it requires a considerable amount of time by the accounting staff to keep track of tax rates, adjust customer billings, and remit taxes. These activities can add to administrative headcount, so there is general resistance to having nexus applied to a business by yet another taxing authority. Nexus avoidance can even be an active planning process that may include the avoidance of company-owned delivery vehicles and avoiding the use of facilities in certain states that are known for being particularly aggressive about collecting sales taxes.

Related Courses

Sales and Use Tax Accounting