State and Local Taxes for Business Owners: Part 1 – An Introduction to SALT
It is a universal fact that a small business owner wears a lot of hats. One of the less appealing ones is managing state and local taxes. There are many types of taxes, and every state has different rules on each type. What does it mean to be doing business in a state? One will find 50 different definitions. Where should a business owner even start?
The first suggestion is to focus on RISK. What is it that an individual cares about the most? For a business, the most important thing is generally to avoid going out of business. An unknown state liability can be a threat to this, since penalties and interest on unpaid liabilities can add up quickly.
Nexus Considerations
In order to consider whether there is a risk in a state, the first thing a business should consider is NEXUS. Nexus is the minimum contact that a business can have in a state which allows the state to impose tax on the business. The concept of nexus applies to all types of tax, such as income taxes, franchise taxes, gross receipts taxes, and sales taxes. A business can have nexus in several different ways, here are just a few to consider:
- Physical Nexus – Having employees or representatives setting foot into a state, having employees working remotely in a state, owning or leasing property, or maintaining inventory in a state all establish physical nexus. Even having an affiliate or subsidiary that is operating in the state can create nexus.
- Economic Nexus – Having sales in a state, such as shipping tangible property to customers located in that state, can create economic nexus. Typically, a threshold of $100,000 in sales is enough for a business to have a filing requirement. The number of transactions in a state can also come into play when determining economic nexus.
- Digital Nexus – This can be incurred in several forms but generally relates to having a digital presence in the state, be it through cookies on user computers or agreements with affiliates directing traffic to the business’ website.
While physical nexus has been what business owners traditionally think of when it comes to tax compliance, economic and digital nexus have become the modern reality and an important consideration. If a business owner determines that they may have some type of nexus in a state, the next step will be to determine what filing requirements they may be subject to.
This article is the first of a five-part SALT series; look out for the next article that will cover strategies for determining nexus. Please reach out to our seasoned and experienced tax professionals if you have questions or need help navigating the complexities of state and local tax. You can also learn more about our services by visiting our Tax service page.
