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Nexus (Tax Nexus)

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Definition:

A nexus in general means a connection. The term nexus is used in tax law to describe a situation in which a business has a "nexus" or presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state. Nexus describes the amount and degree of business activity that must be present before a state can tax an entity's income. If a taxpayer has nexus in a particular state, the taxpayer must ay and collect/remit taxes in that state.

What Determines Nexus?
Nexus is determined differently for income taxes and for sales tax purposes.
For Income Tax Purposes
In general, nexus is created for income tax purposes if an entity derives income from sources within the state, owns or leases property in the state, employs personnel in the state in activities that exceed "mere solicitation," or has capital or property in the state. The requirements vary from state to state.
For Sales Tax Purposes
Nexus is determined for sales tax purposes more loosely. Here are Here are some cases in which a business might have a sales tax nexus in a state:

  • If the business has a physical location in the state
  • If there are resident employees working in the state
  • If the business has property (including intangible property) in the state
  • if there are employees who regularly solicit business in the state.

The issues relating to whether a business has a nexus in a state and is thus subject to the state's taxing authority is complex and each state views the concept of nexus differently.

A nexus for state sales tax purposes has in the past required a physical presence of the taxing business in that state; most recently nexus has also been invoked in relation to affiliates.

 

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