Operating exclusively in one physical location may no longer be ideal for some businesses to remain profitable in an ever-changing landscape. To adapt, many businesses are moving towards virtual business models. As businesses expand their operations across state lines, it becomes increasingly important for states to collect taxes (income and sales tax being the most common).
As a result, many states are making necessary updates to tax laws. For instance, several states have implemented an “economic nexus” standard, which requires businesses to file a state tax return regardless of whether they have a physical presence there.
The AICPA defines economic nexus as the amount and degree of a taxpayer’s business activity that must be present in a state before the taxpayer becomes subject to the state’s taxing jurisdiction or taxing power. There are numerous business activities that can prompt a tax filing. We have listed the most common below. Consider which of these might apply to your business.
- Presence of employees, even without sales
- Execution of contracts
- Others acting in an “agent” capacity
- Employees who work remotely
- Product delivery via a company-owned truck
- Data stored on a server
While the economic nexus standard can be helpful in determining if your business is subject to state tax, there is inconsistency between states that define economic benefit differently. To provide additional guidance, some states have gone a step further to set a “bright-line rule.” The purpose of such a rule is to define a standard, leaving little or no room for interpretation.
To help determine if your business is required to file and pay state taxes:
- Identify which states you have activity in
- Research the state nexus rules for income and sales tax
If you have questions regarding your state tax return filing requirements, please contact one of our professionals today.