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SMART TAX USA - Nexus Study

According to Merriam-Webster’s legal dictionary, a nexus is a connection between things, people or events that forms part of a chain of causation. In tax law, proof of a business nexus is often required in order to establish the appropriate jurisdiction for tax regulations. A business nexus is defined by a minimum level of commercial activity in a specific region that is sufficient to require a company to comply with a particular jurisdiction's tax regulations. Because each state has different rules about whether a company with a presence in their state must collect and/or pay taxes, the question of whether or not a business nexus exists can be crucial to determining a company’s tax liability.

Having a nexus study performed by an independent expert can be an effective method of evaluating tax issues that are related to where and how a company operates. The purpose of a nexus study is to analyze a company’s multi-state commerce, compare the analysis with the tax requirements in each state, and provide alternatives for minimizing tax liabilities. Nexus issues can be complex but a company’s liabilities can be minimized if tax discrepancies are discovered in a nexus study.

Companies engaged in interstate commerce need to know whether jurisdictions will compel them to register in their state, whether collection of sales tax is required and how much sales tax needs to be paid. Traveling salespeople, repair personnel and independent contractors who perform work in a state where a company is not registered can create a business nexus for the company within that state. Even employing an out-of-state sales representative who works from a home office can create a business nexus for a company in the sales representative’s state.

A nexus study can be especially valuable to business management if sales taxes are lower in a state that is not the same in which a company has its primary location. It could be advantageous to create a business nexus in a lower tax state by legally exporting the tax base. Simple ways to meet legal requirements for nexus include local mailing addresses for salespeople, local address information on salespeople’s business cards and listings in telephone information books. The opposite tax liability situation could occur if sales taxes are relatively higher in a different state and avoidance of a business nexus would be the best policy.

A nexus study will verify the need for implementing policies to minimize tax liabilities and include recommendations regarding how to best achieve that goal. Providing a voluntary disclosure statement to each state and relevant local jurisdiction can result in tax relief for previous years.

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