Operating across state lines can present tax risks or rewards

It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all types are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.

But there is a risk: Operating in another state could potentially subject you to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.

Do you have “nexus”?

Essentially, “nexus” means a business presence in a state that’s enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus in a state depends on that state’s chosen criteria. Triggers can vary but common criteria include:

• Employing workers
• Owning or leasing property
• Marketing your products or services
• Maintaining a substantial amount of inventory

Strategic moves

If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes.

Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, for example, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

The complexity of state tax laws offers both risk and opportunity. Contact us at info@tonneson.com for help ensuring your business comes out on the winning end of a move across state lines.
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