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Understanding Your State Nexus

By Amanda Roth, CPA - Senior Tax Manager
Freed Maxick & Battaglia, CPAs

The growth of technology has made a large world seem smaller, and the use of the Internet and ease of transportation have made crossing the border easier then ever.  With NAFTA and a comprehensive tax treaty, it has become increasingly beneficial for Canadian businesses to expand into the United States (US) and vice versa. While crossing the border is great for growing your business, multi state and multinational companies have to consider the state tax implications of doing business in the US.

When businesses cross state lines, they need to know exactly what their activities mean to their state taxes, and particularly if it creates state nexus. Nexus describes a minimum connection (business activity) with a state that must be present before a state can tax a business.  If a business has nexus in a particular state, the business might be responsible for paying income, franchise or sales tax to the state. 

It is important to know that nexus is determined differently for Income and  Sales tax purposes.
In general, income and sales tax nexus are created if an entity:

• Has a physical location in 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 

While these are general guidelines, many states have very specific rules that may differ.  For example, the following activities in NYS may require the filing of income tax returns: 

• Delivering property into NY using company owned trucks
• Storing inventory in NYS (certain exceptions exist for fulfillment centers)
• Having employees enter NY to install or repair property or perform services
• Licensing software to a person in NY, or renting property to a person in NYS

Additionally, under New York State (NYS) sales tax rules, employees or independent representatives soliciting sales in NYS will also create sales tax nexus in NY.  Your company could be required to register and collect sales tax if they are selling “taxable” property into NY and using sales representatives to solicit these products.

To avoid having a Canadian business being dragged into NY taxation, companies should consider setting up a US subsidiary that could handle US business, including registering for state taxes and filing the applicable state tax returns.  It is suggested that you consult a tax advisor and/or lawyer to ensure the proper structure is in place.
To learn more about the many industries Freed Maxick serves, check out www.freedmaxick.com. The firm has long been a leader in providing accounting, tax and business consulting services.  Since 1958, Freed Maxick has been assisting public and private companies, having multiple state and international operations, to enhance their profitability, save taxes, improve accounting systems and preserve wealth.

About Freed Maxick & Battaglia, CPAs
Freed Maxick & Battaglia, CPAs is the largest public accounting firm in Western New York and a Top 100 Firm in the U.S. Freed Maxick & Battaglia has 260 employees and operates an alternative practice structure with RSM McGladrey, the nation’s 5th largest accounting & consulting firm. Freed Maxick has offices in Buffalo, Batavia and Rochester, NY. Visit www.freedmaxick.com .