Nexus Based on Related Companies

You might not have to have your company in a state to find yourself caught up in a nexus tug-of-war. We see this typically with income tax and ‘other’ tax. What happens is that a state that has part of its operation in one state, and part in another state may find that the out-of-state operation has nexus, simply because the companies are connected.

For example, Ohio has an ‘other’ tax called the CAT (Commercial Activity Tax). It’s a gross receipts tax, which is assessed for the privilege of doing business in the state. CAT applies to all kinds of businesses, including sole proprietorships (aka Schedule C) businesses. It begins as soon as your business has exceeded $150,000 in gross receipts in Ohio. CAT applies equally to product and service-based businesses.

So far it’s straightforward. But when CAT reaches outside the state lines, things start to get crazy. Under Ohio law, CAT applies to all companies who have 50% or 80% common ownership, even if the other companies aren’t located in the state. Let’s say you live in Ohio. You’re a 50% owner in an Ohio company that provides sporting goods to local area high schools. You’re also a 50% owner in a Utah company and a New Mexico company who do the same thing. Because you are the common denominator between the three companies, and because you hit that 50% threshold, Ohio wants you to register your Utah company and New Mexico company as well. They’ll give you a break, and won’t charge CAT on money transferred between the companies. But the tradeoff is that you voluntarily agree that your UT and NM companies have nexus for a 2-year period, even if there is nothing to tie them to Ohio. Alternatively, you can just register your portion – meaning that you’ll pay CAT on your 50% of the profit on both the NM and UT companies.

These ‘other’ taxes and related company nexus issues can drown an unprepared business owner in paperwork and penalties. When you talk with your CPA or tax advisor, make sure that you tell them about every company you own or do business with, and how much of an ownership stake you have in each business.

Nexus is a shifting, slippery target. If you’re concerned that you may possibly have a nexus issue, we’ve got a number of products to help. Our Design Your Own Nexus Strategy product is a 140+ page eBook that talks about all aspects of Nexus, and provides handy checklists and other information to help you determine what may or may not apply to you. We’re also offering a Nexus Evaluation Program where you answer some questions and get a fully customized, detailed report on your specific nexus situation.