The Positives of Having a State Tax Nexus Finding

Most of the time we’re focused on avoiding nexus in other states or, at the worst, being prepared for the inevitable. But state nexus isn’t always such a bad deal. In fact, you may actually pay less tax.

In this case, we’re talking about either income tax nexus or not-income tax nexus. Sales tax nexus, as long as you’re properly collecting it, is a pass through tax. It doesn’t cost you anything, except time and possibly lost sales. You collect from your buyers and pass the money on to the state.

But, in the case of state income tax or state not-income tax, there is a real fee that you must pay. And this is where the Positive Side of Nexus comes into play.

Quite simply, of your possible nexus footprints, where is the lowest tax? Here are some additional follow-up questions to consider.

If you have a margin, franchise, CAT or other type of gross receipts tax, will it be your highest tax?

Generally speaking, a high gross margin business like a service business may pay less tax with a gross receipts tax. That’s because there generally aren’t a lot of deductions and the gross receipts percentage is almost always lower than the state income tax rate. On the other hand, if you have a high volume, lower margin product business, a gross receipts tax can be a business-killer.

For example, one of our clients has had a long-time high volume, low margin Texas-based business. The owner was shocked to discover that without some serious nexus strategy work (and quickly) the business would have been paying MORE in Texas state taxes than in federal taxes. On the other hand, a professional services business in Texas may escape the Texas Margin Tax entirely.

What are the state income tax rates for the states in which you may have nexus?

Once you’ve considered these questions, review strategies with your CPA. For example, if you are subject to tax both in Texas and in California, is it possible to book most of the G & A expenses against the California income? The expenses do little to help the Texas Margin tax, but make a significant difference in California.

If you have a choice between nexus in two states, which is the lowest?

The next step is to make sure you have plenty of documentation including minutes, agreements, receipts and other forms of physical proof to establish expenses and nexus footprints.

You may actually find that you will pay less overall tax by adding additional states to your current nexus profile. You will, however, likely add some additional expense due to extra bookkeeping and tax preparation fees.