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September 28, 2016
Let’s say you run a growing business selling widgets and decide to extend your sales region into another state. You meet with ABC Company just across the state border, agree to a sale, and immediately deliver the goods yourself in order to create a good impression. Did you know you just created nexus in that state and your business could now be responsible for charging sales tax and filing a tax return with the state? (Nexus is creating a tax return and sales tax requirement.) As states hurting for cash attempt to collect more sales and income taxes, activities from out-of-state companies continue to receive greater scrutiny by state governments.
Sending a sales person and delivering merchandise personally are just two ways of creating nexus, for example. Income reported in one state isn’t taxed in another. Your tax liability due to another state will be offset by a reduced amount due to your home state. The greater risk is sales tax. If you have created sales tax nexus in another state but didn’t charge sales tax to that state’s customers, you may have to pay the tax yourself (or charge it to your customers after the fact). A good rule of thumb is that you have a tax responsibility if you conduct business in a state where you have created nexus in that state.
Going back to the example above: your billing system didn’t charge Illinois sales tax to ABC Company because your customer was from out of state. Despite your best efforts, ABC Company decided to not purchase any more widgets from you. Later, you get a notice from that other state informing you that you need to remit sales tax on the sale to ABC Company. Now you need to try to collect from ABC Company. If ABC Company won’t pay it, then you are responsible for the tax yourself.
If you think you have created nexus in another state and should be collecting sales tax or filing income tax returns, contact our state and local tax (SALT) team. Our experienced team can guide you through the intricate state-income and sales-tax world, including registrations and filing responsibilities.