As tax presence expands, nexus studies become more important

Where companies do business, and the definition of “doing business,” seems as if it should be obvious given the attention most pay to revenue, marketing and sales efforts. However, not all companies are aware of the states and cities in which they have nexus, especially as those entities look to impose digital or “cookie” nexus to capture as much tax revenue from those doing business in their jurisdictions.

“A company is considered to have nexus when it has a significant enough connection with a state — connection being defined in a number of ways — for that state to impose its laws on the company,” says Jeff Stonerock, tax director at Clarus Partners. “This is most often used with respect to a company’s tax liability.”

This is why a nexus study is important. It’s a review of the company’s activities to determine if they meet the requirements under a particular state’s laws to require the company to file tax returns and pay taxes owed to that state.

Smart Business spoke with Stonerock about tax nexus and how to use nexus studies to determine tax liability.

How is a nexus study run and what should companies know when it’s done?

A nexus study is executed by gathering the facts surrounding the operations and locations of the work and sales of a company. It involves payroll and sales records, and meetings with key personnel.

Companies should realize that not only is current information important, but where the company will or expects to be operating and selling in the future is important as well.

What companies should be sure to conduct a nexus study?

Any company that has activities outside of the city and/or state in which the company is physically located should conduct a nexus study to understand its tax obligations. Typically, activities that create nexus are sales; people, specifically their physical presence in another city or state, as well as their activity; property; or subcontractors working on behalf of the company in a city or state outside of the company’s home base.

What should companies know about cookie nexus and how to account for their presence where these laws are on the books?

All states have different rules related to cookie nexus, also referred to as click-through or affiliate nexus, which in one way or another refer to a company’s digital sales activities. It is important to know that what has traditionally been considered a physical presence in a state to create nexus may no longer be the limit of the definition. Companies that have a digital presence in another state could be required to file returns and pay taxes in that state.

When undertaking a nexus study, companies should be sure to explore their digital presence, especially any digital sales activities, and understand the laws in the states where transactions have occurred.

Who should be on the team that runs a nexus study?

The most important people are the CFO, the head of operations and the human resources lead. The numbers of the business are important, but where and how the business operates as well as where the people are located and working is equally as important in a nexus study.

Companies should work with their accounting professional to understand the filing requirements of the states, including estimated payments and filing dates to make sure they follow all laws going forward. In addition, they should understand what items from their business may require them to file taxes in another state.

How often should companies run a nexus study?

Run a nexus study every year in which business activities in a state increase significantly based on the original nexus study. If the nexus study is performed correctly, a business should have a plan in place to review its activities as they increase in a new state. The subsequent nexus study should take just a couple of hours to perform each year going forward.

Companies that have a growing business and have not performed a nexus study in five years or more should contact their tax professional to ensure their business does not have tax liabilities in other states from the ever-changing state tax laws.

Insights Accounting is brought to you by Clarus Partners