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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.

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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