Got a small biz? Then pay attention to today’s blog. It’s the horror stories of what can happen when you ignore nexus in another state.

Take a look at the past week’s blogs to get a bit of a heads up on what nexus is and how easy it can be to fall under another state’s tax umbrella.

Here are some real life stories of people who found out how easy it was to get stuck with a nexus issue.

A Few Seminars and Suddenly You Owe $1 Million!

A large financial coaching company has a tried and true model of offering free seminars across the US, then getting people to sign up in the back of the room’ for more expensive programs and coaching sessions.

They don’t make money, per se, from the initial promotional free seminars, but it does make a contact with people in the room.

And the big company made two major mistakes. First, they failed to register for sales tax in each of the states in which the seminars were held. Since they were collecting money in the back of the room, they needed to pay sales tax on that money.

Secondly, by having a physical presence in the state, they also created nexus in many states that went beyond just the sales in the back of the room. For example, if you do business one day in the state of Michigan, you have established nexus. So a one day seminar in Michigan, would mean that from here on out, you need to collect and pay sales tax on any sales made to a Michigan resident, even if it was done via mail, fax or the Internet.

They got caught. Total checks for sales tax, interest and penalties totaled over $1 million.

Now that’s an expensive lesson!

iTunes tax on downloads

An online education company thought they had the whole sales tax thing dialed in. They had formed their online company in state income tax-free Wyoming and offered all their products for sale online as digital and PDF downloads. So, there was no physical product for sales tax.

Easy, right? Wrong! They had made a number of nexus mistakes that actually had established a nexus for them in both Arizona and Colorado. One of the owners of the company lived in Colorado and they frequently held seminars there and stored various company items there. They had a full-time assistant who lived in Arizona. She handled sales calls and closed clients, just iike the owner in Colorado did.

Still, these nexus hooks weren’t enough (at least pre-2010) to pull the income into an income tax issue. It was enough for sales tax nexus, but since all they sold were downloads, they figured there was no tax.

Wrong! Arizona and Colorado both have a sales tax on digital downloads. It’s called the iTunes tax, but it’s not just on music – it’s a sales tax that applies to ALL downloads.

Worse yet, Arizona has a 6 year statute of limitations, so they can go back for 6 years to calculate the tax (and considering their budget, probably will). And then they have 6 years after that assessment to collect it.

If you sell digital downloads and have nexus in any of these states, look out!

These 18 states (plus the District of Columbia) tax digital downloads:

• Alabama
• Arizona
• Colorado
• District of Columbia
• Hawaii
• Idaho
• Indiana
• Kentucky
• Louisiana
• Maine
• Mississippi
• Nebraska
• New Jersey
• New Mexico
• South Dakota
• Tennessee
• Texas
• Utah
• Washington
• Wisconsin

Morale of these stories:

Know where you have nexus. Then take the extra step to determine what is subject to sales tax.

Related posts:

1. I Have to File Where? The Two Paths to Income Tax Nexus
2. Look Out For Online Sales Tax
3. What is Nexus and Why You Should Care

Every business owner who ships a product or has a download product needs to read today’s blog. Please tweet it or email a note to your friends and associates.

Today’s issue deals with the two different ways that your business may have to pay state income tax.

The first one, the one most accountants are used to, is the physical presence nexus test.

In this case, you need to have some kind of presence in the state. That means you’ve got inventory, an office, a warehouse – something that links you to the state.

For years, it was pretty clear cut. If you didn’t have an office or building of some kind, you probably didn’t have nexus for income tax purposes.

But, as we learned yesterday, the MTC is changing a lot of things. The new test that many states are adopting is no longer just based on physical presence. The new test is economic presence.

A fairly common standard is that you have income tax nexus if you have physical property, personal property, a certain amount of payroll or 25% or more of sales to residents of the state then you’ve got income tax nexus. That means if you meet one part of this test, you have nexus in another state.

For example, let’s say you have a business located in Kentucky and sell to customers in California. If 25% of your gross income comes from sales to California residents, then you’re going to have to file a state tax return for both Kentucky and California.

Right now the following states have adopted some version of ‘economic presence’ as a test to determine nexus.

• Arizona
• California
• Colorado
• Connecticut
• Florida
• Indiana
• Louisiana
• Maryland
• Michigan
• Minnesota
• New Jersey
• New Mexico
• North Carolina
• Ohio
• Oklahoma
• Oregon
• South Carolina
• Tennessee
• Texas
• Washington
• West Virginia
• Wisconsin

There are two things you need to do if you sell to anyone in another state:

• (1)Take advantage of our special offer at USTaxAid. When you buy the State Nexus Handbook for just $97, you’ll get the information you need to get started with Nexus Planning right now. State Nexus Handbook. Plus, we’ll let you know when you can pick up the expanded State Income Tax Nexus Handbook (regular price $129) for FREE!

• (2) Review the information with your tax accountant. Make sure he or she is up to date with what you need to do. You do not want to run afoul of another state!

Related posts:

1. Selling on the Internet? Beware of Nexus
2. The Internet and Sales Tax Nexus
3. Is Congress Going to Move on Nexus Issue?

Seems most government agencies love initials, and tax agencies are no different. MTC stands for Multistate Tax Commission, and if you do business in more than one state, you may want to get familiar with it.

The job of the MTC is to try and clarify/unify state taxation issues, especially for businesses who operate in more than one state. From your perspective, as a multi-state business owner, you want to pay as little tax as possible. From a state’s perspective, they want to make sure you pay them everything they’re owed. MTC tries to walk the line and keep it fair for everyone. You can read more about the MTC at their website, www.mtc.gov.

The MTC created something called a Multistate Tax Compact. It’s an agreement on how states apply tax laws and determine your business tax nexus. Full members of the MTC are those states that have made the Compact part of state law. That means if you’re audited by one of those states, they must abide by MTC rules. There are also 2 other classes of members. Some states haven’t made the Compact law, but generally go along with it. Other states are still in the toe-dipping stage. They participate in parts of the program, but aren’t bound by anything.

There are only 3 states that have no connection to the MTC: Nevada, Delaware and Virginia. All of the other states belong to one of the 3 membership levels.

Right now, MTC’s big project is trying to develop a workable tax plan for the Internet. States are enacting laws left and right, each trying to find a way to tax the millions of dollars being spent every year on the Internet by state residents.

MTC is also heavily involved in training state level auditors on what they can and can’t do, and how to apply the rules to establish business nexus. If you’re a business located in (or have some business connection to) Alabama, Alaska, Arkansas, California, Colorado, D.C., Hawaii, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, New Mexico, North Dakota, Oregon, South Dakota, Texas, Utah or Washington, your audit must comply with the Compact.

Whether or not your business will be impacted by MTC rules is dependent on the kind of business you’re operating, and the state(s) you’re operating in. But it certainly is in your best interests to explore their website and learn more. If the MTC is going to become a part of your tax world, best to know what’s coming at you.

Related posts:

1. 3 Ways an Operating Agreement can Impact Your Business
2. What’s in Your Business Records Book?
3. Doing Business in Washington? You might be!

Of the two types of nexus: sales tax nexus and income tax nexus, the easiest type of nexus to get (without even meaning to) is sales tax nexus.

If you have a business presence such as a sales office or warehouse, you clearly have nexus because you have a physical presence in that state. This all goes back to a pretty famous court case in our circles: the 1992 Quill Corp case. In this case it was determined that physical presence meant nexus. But if there was no physical presence, there was no nexus.

And for years, that was okay. But, if you’re still relying on that old case, or worse yet, your accountant is and hasn’t talked to you about nexus – you could be in a lot of trouble. That’s because the US Supreme Court and Congress has decided to let each state decide how to determine what nexus means.

Your business could be operating exactly the same in two different states and be required to collect sales tax in one, but not the other.

Here are some general rules to follow to determine if you have nexus. You have sales tax nexus if you:

• Have real or personal property within a state
• Have any of your sales force in the state
• Have employees in the state
• Have inventory in a state, or
• Make a sale directly in a state

Additionally, some states like Michigan have determined you have nexus in the state if you spend just one day in the state doing some kind of business. Other states like New York, Rhode Island and North Carolina say you’ve got nexus if you have an affiliate who gets a referral fee in their state. Look for more states to jump on this band wagon too.

If you haven’t yet had the nexus conversation with your CPA, don’t wait! Just because you don’t collect the sales tax, doesn’t mean you don’t owe it.

We’re featuring the State Nexus Handbook this week on USTaxAid

We are in the process of adding more information on the new Economic Nexus tests that more and more states are adding. When you purchase the State Nexus Handbook for just $97, you’ll get an alert when the new update is ready and a time sensitive offer to get the new update FOR FREE!

The new updated Nexus Handbook will be offered for sale for $129, and will feature the economic nexus changes. It is designed to be sold as a companion to the State Nexus Handbook.

So, when you go to the State Nexus Handbook and buy now for just $97, you’ll get the $129 update for no extra cost.

Related posts:

1. The Internet and Sales Tax Nexus
2. Are You Setting Yourself Up for a Sales Tax Audit?
3. Look Out For Online Sales Tax

New taxes right and left from Congress, expiring tax cuts, estate tax coming back with a wallop, Social Security hits annual deficit for the first time – what’s left in the tax world? Nexus.

If you don’t know what nexus is, or care, then this article is for you!

Nexus means connection. If you have connection, or nexus, with a state, then you’re going to owe that state some taxes.

There are actually two different types of nexus: sales tax nexus and income tax nexus.

If you have sales tax nexus, then you are responsible for collecting and paying sales tax for any subject items sold to residents of a state. It doesn’t matter if you ship the products or even sell downloads (in some states), you’ll have to collect and pay the sales tax.

If you have income tax nexus, you will have to pay income tax, gross receipts, B & O tax, Margin Tax, whatever form of state tax there is on the income from apportioned sales. Here’s where it gets really complicated. Different states have different taxes. Some are based on taxable income calculated similarly to how the federal government makes its calculation, others allow different deductions and still others tax based on a form of gross income.

Additionally, the way you apportion income is not really straightforward either. It could be based on a percentage of sales, a percentage of payroll, some other factor or a combination of multiple items.

The trick here is to make sure you don’t end up with multiple states with different apportioning formulas that mean you pay tax on more than 100% of your income.

The biggest issue with income tax nexus is that there are different methods to determine that nexus. The most common is based on a physical presence test. Recently, a number of states have enacted an economic nexus test in addition.

There are three things you must do to stay safe in the coming nexus tax tsunami:

Megan and I are currently creating a second edition to the Nexus Handbook. That’s how quickly this area of law is changing!

A recent survey showed that 23% of small businesses are in danger of SERIOUS tax penalties right now due to improper nexus calculations.

Make sure you pay attention to the blogs this week. If you haven’t yet signed up for our free weekly newsletter, JOIN HERE.

Related posts:

1. Is There a Nexus Questionnaire Coming Your Way?
2. Selling on the Internet? Beware of Nexus
3. What is Nexus and Why You Should Care

Instant gratification. For some people, it’s a lifestyle. For business owners, it can be a trap.

I see instant gratification in business terms as a deal or a project that makes you money right now. Nothing wrong with that – we’ve all got to keep the lights on and food in the cupboard. And in the early days, it’s essential. You’ve got a reputation to build. But if you run your business solely on the instant gratification principle, you could find that you’re working constantly. That’s hard on you and it’s hard on your family.

In my early business years, I was 100% active income girl. It was what I understood, what I was comfortable with, and where the money was. I worked days, nights, weekends, scrabbled through the odd vacation, and took a lot of phone calls while traveling. I also used to travel with a mini-office. I had a box full of office supplies, so that in the worst-case scenario I could prep documents and send them by Priority Mail or UPS to a client. I did wind up doing that a couple of times!

As the business grew though, so too did the demands on my time. Hiring staff helped to a degree, but I still found that I was doing the bulk of the everyday work. That’s when I began taking a look at the residual side of things.

For me, what I see as residual things are products and books – basically packaging knowledge into a tangible format, and selling it to consumers. Write it once, sell it a thousand times kind of stuff.

Creating that passive income stream has become a goal for me. I’ve had some great encouragement along the way. One of the first products I created went off like a rocket, and I saw some really healthy income, at least until the economy went into free-fall. Things went up and down, and are currently stabilizing, with slow, but steady growth.

The downside to passive income though is that you’ve got to delay gratification. It takes time to create products, and that’s time you won’t be working (and earning). For me, that means either rearranging my schedule every now and then so I disappear for a few days, or working some very long hours, as I take care of business in the daytime and take care of the future in the evenings. It also means being aware that everything I write potentially has a larger purpose.

Is there a financial component of product creation? You bet. There’s time out of your working day, or your evenings. Depending on your delivery method you’ll also have out-of-pocket costs. Those can range from a few hundred, if you’re creating a sales website and maybe some downloads, or CDs, to thousands of dollars, if you’re trying to publish a book. Plus the build is slow. Rarely do you create a product and have instant success. There’s market building and advertising to think about, meaning more time + more costs.

I think the only way to look at those is as investment costs – you’re investing time, money (and likely both) up front, so you can have some time, money (and hopefully both), down the road, at least that’s what I tell myself at 2am when I’m working on a project.

There’s another investment element to think about, too. Products become a marketing tool you can use in your business. An eBook on a topic you’ve got knowledge about can easily help to establish you as an industry leader. Do you give it away? Why not – especially if it’s going to lead to a sale worth 5x what you charge for the eBook.

As business owners, we carry so much in our heads – and much of that has value. Getting that knowledge out of your head is perhaps the first step towards creating a whole new income stream, and an increased business presence. Yeah, you’ll spend some time, but isn’t that why we invented TiVo?

Related posts:

1. 3 Types of Business Income
2. Passive Income and the IRS
3. Turn Business Assets Into Passive Income Generators

Does your business make you tired, day in and day out? If so, chances are you’re working at just one type of business income: active income.

Active income means that you have to work to get paid. It also means that you haven’t looked at ways of leveraging your time. You’re caught in the entrepreneurial time trap. Bootstrapping in the beginning got your through what you needed to, but as time went on, you likely started thinking about adding staff. Maybe you took that step and hired someone. And, if you’re like most business owners, those first employees let you down. They didn’t do the work the way you wanted them to. They were slower than you. The quality wasn’t as good. They might even have stolen from you.

If you want to see some of the ‘stupid business stories’ that talk about what happens when employees go back, make sure you check out SmartBusinessStupidBusinessOnline.com on Saturdays. We highlight some of the stories of businesses gone wrong that others have sent us, and most importantly, the lessons you can take away from that.

But you can build a business with systems that work so you don’t have to. There are three steps to building systems: (1) Write systems (2) Train systems (3) Enforce systems. In Smart Business Stupid Business we give you step-by-step programs to document systems. That alone might be the best reason to pick up your own copy of Smart Business Stupid Business

As you move from active income to leveraged income (with much higher PROI – personal return on investment), systems will be your best friend.

You’ll safely and confidently turn over work you don’t like to do and focus on what you do best. That’s leveraged income.

Then it’s time to start looking at passive income. Make no mistake, there is work to passive income. But the secret is that you use money and/or time in the beginning to create income streams that continue. This past weekend, Megan and I had a teleseminar that had almost 1200 people sign up for. We gave good information on how to protect LLCs against the new wave of LLC-busting techniques some lawyers are using. And we gave a fantastic offer with good discounts (the 2011 Operation Guide to LLCs). And then every time we hit ‘send/receive’, we had orders flood in. It was work in the beginning, but it became passive income.

Every single business owner has that same ability to create active, leverage AND passive income from the business they already have.

Check out Smart Business Stupid Business Online for ideas on how you can do that.

Related posts:

1. Turn Business Assets Into Passive Income Generators
2. Passive Income and the IRS
3. How To Report Form 1099-C Income Without Paying Extra Taxes

There is a popular saying that if you work at your passion, the money will follow. Sometimes it works, most often it doesn’t. Why?

Or, let’s look at it the opposite way. What about the people who work at something that they are good at and that makes them money, only to burn out? They never had the passion for the work.

There are actually three elements to creating that ‘sweet spot’ of business income. These three are: What you’re good at (entrepreneurial), What you’re passionate about (emotional), and What people will pay (economic).

Picture three circles, overlapping in the middle. That middle, where all three circles meet is the ‘e-center’ and that is where you can make money, do good work and love what you do.

If you do just two of them, you’ll never be in complete balance. It takes all three!

Take some time today and think about what you’re passionate about. Ask others what they feel you’re best in the world at. Then put them together in way that solves other people’s problems. You’ll have created a business that can change the world, and your life.

Related posts:

1. The Secret Language the Rich Know
2. When the Series LLC Doesn’t Work
3. Can Bookkeeping Make You Rich?

One of the real life stories from Smart Business Stupid Business is about a client of mine who went from employee to business owner and discovered $10,000.

Before he lost his job, he was making $50,000 per year as a middle manager. His credit cards were maxed out and he worried everyday driving to work because his tires were shot. If he lost a tire, he’d have no way to buy another.

Then the worst thing happened, he lost his job.

That’s happened to a lot of people these days, so nothing new there. The fortunate thing for him was that he found a position within a month. Only he was going to be an independent contractor, not an employee. He made the same amount of gross income, but he was now responsible for paying his own taxes and medical insurance.

But somehow, at the end of the year, after his taxes were all figured out, he had an extra $10,000 in cash.

That’s because a lot of the expenses that he would normally have anyway like his car, home office, computer, cell phone, travel and the like became at least partially deductible.

He went from “Earn-Tax-Spend” to “Earn-Spend-Tax” resulting in less tax and more money.

If you don’t have a business yet, start one today! If you have a business, ask yourself: Are you getting all the benefits you should?

We’re covering How to Discover Your Hidden Business Deductions in the USTaxAid Coaching course tonight. Join us!

Remember that coaching is free when you become a client of USTaxAid Services.

Related posts:

1. Finding Money for Your Business
2. 95% of Businesses May Get a Tax Bill from a State They Didn’t Even Know They Owed Money To. Is Your Business One?
3. S Corp Owners Breathe a Little Easier … But Start Planning for the Future

Want to be $1,000 richer this Friday? Sure! Who wouldn’t? There are two ways to make that happen: make more money or pay less in expenses. If I stopped there, though, this would be the shortest blog post I’ve ever written.

This week we’re going to take a bit of a departure from taxes to talk about how to put more cash in your pocket.

If you pay less taxes, you’ll have more cash. That’s because taxes are probably one of your biggest expenses. When you cut your expenses, you definitely will put more money in your pocket. And if those expenses are after tax (not deductible), you’ll actually do better saving $1,000 then making $1,000. That’s because the $1,000 will be subject to taxes. If you want to find ways to pay less tax, then please scan the archived blog posts. You’ll find plenty of ideas.

How about ways to pay less in expenses? One of the best tricks I know is “Cashflow Sunday”. Every Sunday, my family comes up with a list of 10 things we can do during the next week to create cashflow. Some of the items will be ways to collect money. Others are ways to decrease expenses. Usually the expense items are easier to identify and put in place right away. But there is a limit to how much you can cut. On the other hand, there are very few limits to how much cash you can create.

If you don’t have a business, start one. If you have one, how are you doing at creating/ all three types of income: (1) active (2) leveraged and (3) passive?

We’ll be talking about all those ideas more this week in the blog posts.

For more information on building your Smart Business, check out Smart Business Stupid Business When you sign up for the Insider’s Club, you’ll save 10% on the book!

Review:

This book clearly, and almost informally, discusses choosing a partner, building business credit, selecting the right corporate structure and even explores business exit strategies. The style is refreshing in that it feels like they are talking directly to me. Every time I start, merge or acquire a company, I have to consider many of the things covered in this book, it is quite comprehensive. The content is primarily focused on building a business and has actually given me some ideas that I had not considered in running my own companies. Randy Thompson, Geneva, WI

Related posts:

1. 3 Ways an Operating Agreement can Impact Your Business
2. Finding Money for Your Business
3. 95% of Businesses May Get a Tax Bill from a State They Didn’t Even Know They Owed Money To. Is Your Business One?