Are Your Business Activities in Another State Causing Income Tax Nexus?
Be Aware of What Might Trigger Nexus
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Many business are not aware that their business activities in another state is causing nexus which would require them to pay taxes to that state. Each state has its own rules regarding nexus. The Pennsylvania Department of Revenue  defines nexus for income tax purposes as  a physical connection to the Commonwealth. If a business conducts any of the following activities in Pennsylvania, it has established nexus:
  1. Having or maintaining, either directly or through a subsidiary, an office, distribution house, sales house, warehouse, service enterprise or other place of business irrespective of whether the place of business is located permanently or temporarily or authorized to do business within this commonwealth.

  2. Having or maintaining an agent of general or restrictive authority irrespective of whether the agent is located permanently or temporarily or authorized to do business within Pennsylvania.

  3. Maintaining a stock of goods.

  4. Regularly soliciting orders through a solicitor, salesman, agent or representative, whether or not the orders are accepted in Pennsylvania, or performing promotional activities in this commonwealth.

  5. Regularly engaging in the delivery of property in Pennsylvania, other than by common carrier or U.S. mail, and soliciting business within the Commonwealth, whether by means of U.S. mail, radio, television, newspaper or otherwise.

  6. Regularly engaging in an activity in connection with the leasing or servicing of property which is located within the Commonwealth.

Many states are adopting new nexus standards based on economic or factor presence. Economic presence nexus is generally based on a business directing economic activity in the state, or by having income from sales to customers in the state. More than 40 states, including New York, have economic nexus standards with different criteria for determining if a business has an economic presence. 

A few states have adopted a factor presence standard (bright-line nexus). Established by the Multistate Tax Commission, this standard is an attempt to make state taxation more uniform. Under the factor presence standard, a business is considered to have substantial nexus in a state if any of the following thresholds are exceeded during the tax year:

  • $50,000 of property
  • $50,000 of payroll
  • $500,000 of sales
  • 25% of the businesses total property, total payroll or total sales

New York bases nexus on both the economic and factor presence standards. 

If you suspect that your business activities in another state may have caused nexus, participating in a Voluntary Disclosure Program (VDP) would be advantageous. Pennsylvania, New Jersey, New York and many other states have VDPs for businesses and individuals who have recently become aware of their state tax obligations to voluntarily come forward and file the appropriate business registrations, tax return(s), and pay current and back taxes. You may be able to negotiate favorable terms which could include reduced interest and penalties, as well as a limited look-back period of four years (three prior years and the current year). 

The Pennsylvania Department of Revenue is also offering a tax amnesty program. All penalties and half of the interest owed by those who apply and pay delinquent taxes from April 21 through June 19, 2017 will be waived. Individuals and businesses with past-due state taxes as of December 31, 2015, are generally eligible, as well as taxpayers who failed to file for tax periods due on or before December 31, 2015. 

Nexus for income, franchise/net worth, sales/use, and other tax purposes is complicated since there is a lot of inconsistency among the states. We would be happy to help you to determine if your business activities in other states is causing nexus. Feel free to call is at 610.828.1900. Contact either Michael Sexton, CPA, CCIFP, Director – Tax Services at Michael.Sexton@MCC-CPAs.com or me at Marty.McCarthy@MCC-CPAs.com. We are always happy to help.

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code.  We strongly advise you to seek professional assistance with respect to your specific issue(s).  

Martin C. McCarthy, CPA
Managing Partner
McCarthy & Company, PC